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Wall Street schools Career Education

by Jennifer Kahn
March 01, 2012


Jennifer Kahn/MEDILL

Career Ed. operates 90 campuses around the world.One of them is International Academy of Design & Education, located on State Street in the Loop.


Jennifer Kahn/MEDILL

 Le Cordon Bleu, known for producing some big-time chefs, is located in Chicago's River North neighborhood.

The for-profit education industry has been taking it on the chin from regulators and investors alike. And among that unpopular sector, Career Education Corp. has fared far worse than many of its industry peers.

The Hoffman Estates education provider is one of the industry’s biggest players, operating schools such as the Le Cordon Bleu North America cooking academy, the International Academy of Design & Technology,and 88 other campuses, in the U.S. and abroad.  

Over the past twenty-two months, Career Education’s shares have lost more than 70 percent of their value, as it struggles to remedy  its reputation for being unable to place students into jobs, lying regarding job-placement data and faulty recruitment practices.

Career Ed, with a student population of over 100,000 and a spectrum of education offerings ranging from high-school diploma programs to associate degrees all the way to master’s and even doctoral studies, isn’t alone in facing such issues. 

The entire for-profit college sector has been under pressure for well over a year.  Critics (including regulators)have been loudly pointing out that graduates of these schools frequently cannot find jobs in their chosen field, and are left with hefty loans, on which, in many cases, they default.

The U.S. Department of Education, which often serves as the guarantor of such student loans and is left holding the bag when students can’t pay, has crafted new regulations in order to limit the amount of abuse in the industry. Among other things, the government has enhanced regulations on student loans, which took effect last summer.

Uncle Sam has also tightened regulations about how aggressively for-profit schools can recruit new students.

Those changes have hurt the entire sector. At Career Education, for example, new student enrollment of has consistently dwindled for the past year.    During the fourth quarter of 2011, the number of students newly enrolled at Career Education colleges dropped 24 percent compared to 20,160 a year ago.

In addition to high-powered recruiting tactics, Career Ed has drawn fire for allegedly mis-stating the number of students who found work after attending the company’s schools.  With federal regulators looking into that issue, the company announced in mid-2011 that directors had ordered an in-house investigation into Career Ed’s job-placement data.

In early November, the company disclosed the internal investigation had “confirmed the existence of improper placement determination practices” at a number of the company’s schools.  That same day – in connection with those findings – President and CEO Gary McCullough resigned.

On that day, Career Ed shares plummeted 48 percent, the largest drop in the company’s history.

In the wake of that fiasco, which included the release of dismal third-quarter results, shareholders filed lawsuits against Career Education for allegedly violating its fiduciary responsibilities and other abuses.

“The risks in owning this name – potential sanctions from accreditation companies, risk in finding placement improprieties at the other segments, the lack of a CEO and the apparent accelerating rate of fundamental deterioration – are sizable,” said Jeffrey M. Silber, an analyst at BMO Capital Markets Corp., in his research notes discussing third-quarter results.

In the wake McCullough’s exit, Career Ed named Chairman Steven Lesnik as interim CEO. Lesnik has been trying to put the company’s house back in order, and he assured analysts in a conference call this month that he’s got a ‘long-range strategic plan” for Career Ed, and “at the heart of the plan is a commitment to simplify the company.”

Career Ed, he said, has “a lot of work facing us to address the regulatory challenges and operational complexity today that are barriers to us reaching growth and efficiency.”

But those promises, delivered on a day when Career turned in a hefty fourth-quarter loss because of big asset writedowns, didn’t go over well with investors, and the company’s shares fell 19 percent that day.

For full-year 2011, the company reported net earnings of $18.6 million, or 25 cents per share, in sharp contrast with $157.8 million, or $1.95 per diluted share in the prior year.   Full-year revenue fell 10 percent to $1.88 billion, from $2.09 billion last year.

“Straight talk was welcome, but remedy will likely prove challenging,” said Trace A. Urdan, an analyst at Wunderlich Securities Inc.

“Management acknowledged many of the company’s weaknesses, including an unwieldy span of control, confused and unfocused brand identity, serious reputational issues, and little credibility around compliance.”
The “proposed remedies,” she said, “appear sound, but may prove easier to prescribe than to execute.” 

For one thing, the analyst said, “Although management downplayed the risk (of the job placement controversy) and wants to put the episode behind it, we do not believe fallout from the placement rate scandal is over."

She’s not alone in her cautious view. A number of analysts believe that the company was simply too late in identifying and handling the internal problem, leaving an uncertain future for Career Education.

Career’s price-to-earnings ratio reflects investor unease: at 4.37, it’s well below the 12.01 PE ratio of industry rival Apollo Group Inc., as well as the 15.78 PE ratio for the entire S&P 500.

In order for Career Education to recover – or merely catch up with competitors, the company may indeed need to revise its business plan. There’s speculation that the company may decide to sell some of its schools in order to raise cash, if its situation continues to worsen.

“The company is definitely challenged,” said Brandon Dobell, an analyst at Chicago-based William Blair & Co.  Still, “If you can convince shareholders that the business will continue to grow, then there is a lot of value,” he added. 

Career Ed could recover, said the analyst, if management is “proactive” and regulatory issues go its way.

Still, he said in an interview,  “The most likely outcome is some kind of breakup transaction.”