Continuing Education, Domestic, For-Profit, Friend, Fraud, or Fishy, Investors, Required, University & College - Written by on Thursday, August 4, 2011 7:05 - 0 Comments

Career Education Corp. Disclosure of “Improper Practices” Overshadows Good Q2

photo: annual report 2009

by Elbert Chu

 

Career Education Corp. (NASDAQ: CECO) beat earnings estimates for Q2 EPS coming in at $.71 vs. street consensus at $.65. New enrollments were down 14%.

The company also disclosed that they discovered “improper practices” at their health education division related to “reported placement rates.” Expect the stock to suffer unless investors get some solid answers from management quickly. After the close, the stock dipped 10.61% to $19.55 (-$2.32) after closing at $21.87.

UBS analyst, Ariel Sokol writes that Career Education’s health education division is only a small portion of their business:

In our sum-of-the-parts model, we only assign the health education segment $1.69/share of value.  The stock as of this evening was indicating a bid of $19.55 vs. the ending day stock price of $21.87 – assuming that the stock trades down 11%, the Street would have effectively discounted the value of the Health Education business to nothing, in our opinion. 

The key question is to understand what happened and who was involved.  Improper practices at even well-run institutions occur from time to time.  Businesses make appropriate adjustments and move on; however, investors could need greater detail on what transpired to give them confidence that “improper practices” are not pervasive to other parts of Career Education.

“The integrity of Career Education and its schools is paramount. I am greatly disappointed that some people within our organization have acted inappropriately and not lived up to the standards Career Education expects,” said Gary E. McCullough, president and chief executive officer.

The issue was identified as part of the Schaumburg, IL-based Career Education Corp’s response to the May 17, 2011 subpoena by New York Attorney General’s office. In case you missed it, there were four other schools named, including: Trump University, Lincoln Educational Services, and Corinthian Colleges. The New York Times Michael Barbaro reports:

Eric T. Schneiderman (NY attorney general) is looking into whether the schools and their recruiters misrepresent their ability to find students jobs, the quality of instruction, the cost of attending, and their programs accreditation, among other things. Such activities could constitute deceptive trade practices or fraud.

 

Full earnings release from Career Education Corp.

More on the subpoena, and particularly Trump University, at New York Times.

 

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