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Get Four
|  | DECEMBER 17, 2003
By Eric Wahlgren Boning Up on Education Stocks Despite claims of wrongdoing at one top for-profit college, analysts remain bullish on it -- and the sector -- as enrollment surges For several years now, stocks of companies that offer college and alternative degrees have gotten high marks from investors for their juicy returns. These outfits' revenues and profits have soared as adults flocked to their schools seeking skills that would make them stand out in a tight labor market. As a result, a $100 investment in Career Education Corp. (CECO ) when it went public at $4 a share in 1998 would have been worth $1,000 -- 10 times as much -- by the end of 2002, according to the company's Web site. But recent allegations against CEC, one of the biggest companies in the business, that student records were tinkered with at two campuses have sent the sector into detention. Shares of the post-secondary educators fell more than 10% on average in the week after the latest charges against CEC surfaced in a Dec. 3 newspaper report. They've since recovered some after Hoffman Estates (Ill.)-based CEC vigorously denied the claims. However, at $37.65, CEC is still 32% down from its Oct. 29 closing peak of $55.11. Indeed, all the for-profit universities are off their highs as investors fret that new allegations may surface, perhaps at other schools. BUYING OPPORTUNITY? Despite the recent pullback, shares remain relatively pricey. CEC, which provides degrees in culinary arts, visual design, and other more mainstream programs, is trading around 34 times its calendar year 2003 estimated earnings, according to analysts. The University of Phoenix Online (UOPX ), which offers degrees in business, technology, and other programs to working adults who take courses over the Internet, has a hefty price-earnings multiple of around 69. The entire group's sharp reaction to the CEC allegations suggests that investors were looking for an excuse to take profits. For those who have been waiting for dips to get into this sector, now may be a buying opportunity, Wall Street pros say. The reason? Investing experts are skeptical of the CEC allegations. And even if the charges proved to be true at the two CEC campuses, pervasive wrongdoing in the outfit is unlikely, says Trace Urdan who has followed the sector for six years. The senior equity analyst at San Francisco's ThinkEquity Partners adds that for other companies to have similar alleged problems would be even more of a stretch. "CEC and each of these schools are operating well within the boundaries of the current regulatory framework," says Urdan. "If I'm correct and this is really not anything different than business as usual, you'll see the financial performance continue to be strong, and the valuations will creep back up." Urdan has a strong buy rating and a $56 price target on the stock, which would represent a 49% appreciation in 12 months. (ThinkEquity partners is a market maker in CEC stock.) COMPLAINTS AND SUITS. In the most recent allegations, a former registrar at CEC's Brooks Institute of Photography in Santa Barbara, Calif., filed a complaint with the Accrediting Council for Independent Colleges & Schools (ACICS) charging that school officials inflated enrollment, among other alleged no-no's, according to a Dec. 3 article in the Santa Barbara News Press. Before that, a former director at Gibbs College in Montclair, N.J., filed a wrongful-termination suit in November, charging that students lacking proper qualifications were still allowed to graduate, according to a separate press report. CEC spokesperson Sean Murphy says it has not been served with the Gibbs College suit but adds that it has obtained a copy and found the suit to be without merit. As for the Santa Barbara incident, Murphy says the ACICS is expected to conclude its review within a few weeks. But Murphy says CEC has checks and balances in place to prevent the kind of activity that's alleged to have taken place. What's more, CEC has also instituted an independent whistleblower system that lets any employee report suspicious conduct anonymously, he says. Analysts agree that college operators, including CEC, have controls to prevent precisely this type of activity. For starters, college accreditors verify data using numerous sources, making any type of fraud tough without collusion among multiple individuals at a school, analysts say. Also, fraudulent activity would soon be spotted in school performance, analysts say. For instance, if weak students were allowed to graduate, placement rates would likely fall -- which has not been the case. "In our opinion, accreditation at these schools is not in jeopardy, nor do we believe that there will be material sanctions from state and regulatory bodies," Richard Close, a Jefferies analyst, writes in a recent research note. Close rates the shares a buy. (Jefferies is a market maker in CEC stock.)
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