Bottom line, Career Education (NASDAQ:CECO) is dependent on student enrollments for income. CECO's enrollments are declining faster than its stated forecasts. CECO's cash position continues to erode and regulators require a reserve in order to enroll new students. This conflict between enrollment trends and cash requirements presents a significant challenge to CECO's future in the medium to long term.
The bullet points on CECO
· Enrollments 2011 decline 18%, decline 2012 23%, expected decline 2013 25%.
· CFO O'Sullivan predicted 2% decline for 2013 in '12 Q4 and '13 Q1 conference calls. (O'Sullivan is a newly minted internal promotion without previous CFO experience.)
· CEO Steffey refuses to confirm enrollment projections for '13 in '13 Q2 conference call.
· Department Of Education requires cash assets to be held in reserve adequate to "teach-out" existing students in case of financial crisis. If CECO has less cash on hand than will be required to "teach-out" currently enrolled students, CECO will not be allowed to enroll students for Federal Financial Aid. (Currently +70% of students use Financial Aid, this restriction may be assumed to be catastrophic to CECO investors)
· Steffey addresses this issue in '13 Q2 conference call, "Lastly, I want to mention that we continue to evaluate our options to access capital understanding that maintaining a sufficient financial responsibility ratio with the Department of Education is critical as we continue our turnaround strategy."
· Importantly, the Cash Equivalents: Dec 31 2012 $402,313M, June 31 2013 $241,834M
CECO operates in a market space that is being in-filled with competition like Western Governor's University and virtually all non-profit Universities. The important points of CECO are not past performance but current competitive landscape and regulatory action. The online based for-profit University model is being ruthlessly co-opted by non-profits in search of budget expansions. This levels the playing field in practical ability-to-attend-online terms for potential students while greatly diminishing CECO degrees by comparison as brand offerings.
With crashing enrollments and a required reserve ratio from regulators to remain in operation, there is a cash flow disaster looming on the horizon. This September the Board will meet to discuss strategic options. Of all CECO business units only the Colorado Technical University is a viable balance sheet enterprise. Unfortunately it will be very difficult to extricate this from the breaking-even-AIU University and the failing Health, Culinary, and Art businesses.
I am predicting a restructuring event as the logical and pragmatic path out of this position. Given the big moves in Blum Capital of late (the selling of 1,267,278 shares since 7-29-13), with assumed significant losses, this position could be considered as probable given the trading activity.
In the medium to long term I am confidently short on CECO. The near term will bring volatility as the Board takes "strategic" measures to right the (sinking) ship.
Disclosure: I am short CECO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
