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For months, market watchers have seen steadily increasing numbers of unemployed workers as a gloomy sign. But for those in the post-secondary education business, the bad news has been a bit easier to take. As the economy struggles to grow and the labor market is pinched, employed and unemployed workers alike have come to appreciate the value of career-enhancing practical training. And when a company like Career Education (CECO
) can boast a graduate placement rate of 93% at its 51 schools in the U.S. and abroad, little wonder students flock to its schools to perk up their résumés.
Career Ed, a provider of degree programs to 51,100 students in varied disciplines such as information technology, culinary arts, and visual communications, posted healthy gains in a bleak year for the overall market. For the yearlong period ended Feb. 14, the stock provided investors with a total return of 25.5%, compared with -21% for the Standard & Poor's MidCap 400 index. Over three years, the Hoffman Estates, (Ill.)-based company has mounted an even more impressive winning streak, returning a juicy 386% to investors.
Even as the stock trades near its historical high of $52 a share, analysts think Career Ed could continue its steady growth story. With a solid balance sheet, low debt, a history of successful acquisitions, and forays into new academic disciplines such as health care and online learning, some analysts think the company's revenues -- which grew 42%, to $750 million, in 2002 -- could top $1 billion in 2003.
OPPORTUNITY KNOCKS. CEO John Larson says Career Ed can keep up its lucrative growth rate, and Wall Street seems to agree for now. In February, the company completed an acquisition of a group of nine French schools offering business and health-care programs. "I wouldn't be surprised if they did another acquisition or two this year," says Richard Close, vice-president for equity research at SunTrust Robinson Humphrey. "They'll be opportunistic."
Larson stops short of saying Career Ed will become a more aggressive acquirer in 2003, but it did file a $300 million shelf offering with the Securities & Exchange Commission in March -- a move that gives it more flexibility to move quickly on future buys. "[Financing] any potential mid- to large-size acquisitions could be one of the uses of a [filing] like that," says Litfin.
From a valuation perspective, Career Ed'ss price-earnings ratio is a relatively robust 33.9, compared with an average 24.9 p-e for the S&P MidCap 400. Thus, Career Education may not be the bargain it once was, especially as analysts invoke the "law of large numbers." That is, the larger a company gets, the more difficult it will be for it to sustain an impressive growth record.
"SCHOOLS OF CHOICE." Many analysts remain bullish despite more modest growth estimates, citing Career Ed's 20-quarter streak of record earnings results. "We're looking for earnings growth of 28% for the current year, and it's trading at a discount to that," says Close. "Over the long term, people will be well rewarded."
Propelling Career Ed's growth is a series of 25 acquisitions made since its inception in 1994, followed by aggressive marketing campaigns. "They were not acquiring fixer-uppers. They were acquiring 'schools of choice'," says Alexander Paris Jr., director of research at Barrington Research. In the recent sluggish economy, Career Ed has been less prone to snatching up schools. Last year's lone acquisition, Missouri College, a 500-student school in St. Louis, marked the company's first steps into health care -- a field Larson expects to drive growth in the coming year.
Despite the churlish economy's chilling effect on acquisitions, analysts say the soft labor market plays right into Career Ed's hands. "You could call it a sweet spot," says Matthew Litfin, an equity analyst at William Blair. The economy is weak enough to nudge people into career-advancement classes, but not so weak that folks can't afford to lay out a little extra for tuition. "The job market is not robust," says Litfin. "But there are certainly jobs out there, ... a carrot [for potential students]."
GROWTH DRIVERS. Analysts, however, are more taken with Career Ed's ability to grow internally by adding to class rosters and expanding existing businesses. This year, Larson plans to open campuses in Las Vegas, Detroit, Atlanta, and Houston -- up from two openings in 2002. "With a better economy you might do even more of those startups," says Larson. And Career Ed plans to implement 50 "program transplants," which bring different educational disciplines to existing campuses.
Another growth driver comes from its American InterContinental Online e-learning outfit, which awards bachelors and masters degrees in education, business, information technology, and visual communications. Career Ed expects about 3,000 students to be enrolled by yearend, and Larson estimates the unit will provide revenues of $60 million. "By the end of 2005, that should be somewhere between $200 million and $300 million," he says.
As the stock price pushes its historical upper limit, a quick upswing in the economy could knock Career Ed out of its comfort zone. A fast resolution to a war in Iraq and a subsequent upturn in the labor market may well persuade folks to put off further schooling. "[Career Ed's] No. 1 competitor is the job market," says Paris. "Any jobs that are created could have a negative impact on enrollments." Still, Paris maintains an outperform rating on the stock, figuring that an economic rebound's negative effect on Career Ed would be offset by increased job placements and rising salaries.
CASE STUDY? Another hazard is if the geopolitical situation in the Middle East and elsewhere worsens and economic woes protract. People could then end up with less disposable income to spend on classes, companies may be less willing to foot the bill for employee training, and default rates on student loans could rise.
Unlike other for-profit education companies in its peer group, such as technology-centric DeVry (DV
), many analysts think Career Education is diversified enough to avoid the vagaries of economic turbulence. If past is prologue, and it continues to grow in good times and bad, Career Education could become a case study worth attention from investors.
MARCH 24, 2003 |
Copyright 2003, Bloomberg L.P.
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