Career Education Corporation (NASDAQ:CECO) shares rallied 14% on Tuesday following the news of CEO Jack Larsen stepping down. Larson will remain on as Chairman. After listening to the conference call last night we are feeling more comfortable with our long position in the CECO shares.
The action suggests the company is serious about change, which we view as a positive.
Keep in mind the company has been plagued by regulatory and legal problems, as well as slowing enrollment growth. Investors have pounded the shares as the problems emerged with the CECO shares shedding 43% of their value in the past 52 weeks. Change was likely necessary and we got that last night.
Management change should provide much needed catalyst for CECO
We think this might provide the catalyst the CECO shares have been lacking. The CECO shares have been inexpensive for some time, but lacked any catalyst to get investors interested.
* The news should encourage frustrated investors to remain patient;
* And could help on the regulatory front, signaling to regulatory bodies that some heads have rolled following past problems;
* A management change could make it easier to implement substantial cost cuts;
* Lastly, the move could suggest the company is in play (see comments below).
Shares are inexpensive at only 4.1X 2007 EBITDA. Consensus EPS is $1.65 for 2007 so the shares trade at only a 12.8 P/E. Consensus suggests a LT EPS growth rate of 13%. ROIC remains robust at 20% and the balance sheet is strong, with $4/share of cash on the balance sheet.
Expect talk of take-out to start up again.
Recall Education Management was taken out by Providence Equity and Goldman Sachs Capital Management for $3.6B back in March of 2006.