After 41% Gain In Career Education, We Are Out
- We no longer see the stock catalysts identified in 2017.
- A buyout is not likely at these prices. The company is not overvalued, but we believe that the previous earnings momentum is over.
- The ROE and the cash per share are no more so astonishing.
- After four years of FCF acceleration, it declined in 2017. We believe that the momentum could be over.
We wrote about Career Education Corp. (NASDAQ:CECO) in Career Education Corporation - ROE 49.57%, One-Third Of Pure Cash, And No Debt. Undoubtedly, it was one of our best pick in 2017. The company returned more than 41% returns in about a year. We appreciate it, and congratulate those followers who followed our advice.
The most critical feature was not impressive growth in the amount of student enrollment in 2017:
Our total student enrollment as of December 31, 2017 and 2016 was approximately 34,800 students and 36,600 students, respectively. (Source)
Our readers should remember our article. We said that the company had gone through a large restructuring process, and had sold assets to private equities. We believe that the company brought out the gains from this difficult period in the second part of 2017. Have a look at the good amount of EPS surprises in 2017 and note that the revenue line did not surprise:
As a result, the market pushed up the share price from the $9 mark to hit the $13.24 level and returned more than 41% returns to our readers. Check the following stock chart, wherein the EPS surprises are included:
The future of the stock is more uncertain. The company is still somewhat undervalued. However, we believe that most of the stock catalysts seen in 2017 have now disappeared. Thus, we believe that it is time to be cautious and close the position on this name.
First Reason: ROE, Cash per Share and book value
While we noted in our previous article that the ROE was impressive, more than 50%, right now it is at more rational level, 6.89%. In addition, the cash per share is $2.52, and the book value per share is $4.29. With the shares trading at $9, like in January 2017, those valuations are interesting. However, at the current share price level of $13.24, this is no more a bargain. Certainly, it is not overvalued, but the "margin of safety" is less significant.
Second Reason: Nobody will take out the company at this current share price
In our previous report, we noted that CECO had sold assets to financial buyers in 2016. Apax Partners bought some assets for $305 million, and Providence Equity Partners, LLC, also bought some assets. Furthermore, Apollo Education Group (NASDAQ:APOL), which is a competitor of CECEO, was recently sold to private equities. Our thesis was that the company may sell itself, not only because it was undervalued, but also because there existed demand for companies in the industry.
What did change? There are two main reasons to believe that the company is no more an interesting target, and the buyout will not happen. Firstly, the Board of Directors solved the situation. The company is no more undervalued. Thus, we don't see funds buying out the company at these prices. Secondly, we are sure that bankers tried to sell this company, but it did not work at that time. If the funds didn't do it in 2017 - they had enough time - they will not do it now.
Third: The company has a stock repurchase program, but it is not buying shares
According to the most recent 10-k, the company had approximately $183.3 million available for stock repurchases in 2017. The program may confuse some naive investors. The company has a stock buyback program. Is the company buying back shares? Well, no, the company is not buying back shares. Read the following carefully:
We did not repurchase any shares of our common stock during the year ended December 31, 2017 except for shares delivered back to the Company for payment of withholding taxes from employees for vesting restricted stock units. Under the Company’s previously authorized stock repurchase program, stock repurchases may be made on the open market or in privately negotiated transactions from time to time, depending on factors including market conditions and corporate and regulatory requirements. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time. As of December 31, 2017, approximately $183.3 million was available under the stock repurchase program. (Source)
The company is not obviously selling shares at these prices either, thus the amount of shares is constant:
Four: We don't expect more schools closures
Please remember the following words from our previous piece:
Recently, the company decided to close most of its schools and maintain only two online brands: American InterContinental University and Colorado Technical University. Here is a list of schools that are about to be closed in the next few years, or have been already sold: Missouri College, Le Cordon Bleu, Harrington College of Design, Briarcliffe College, Sanford-Brown, and Brooks Institute. This was quite the radical transformation. Source
The company executed a hard restructuring program, in which the company closed many of its schools. That's the main reason that PE funds did not buyout the company. The Board was already reacting to the difficult environment and was really thinking about the shareholders.
The next question is whether the company will continue with these practices. In our view, it is first of all not necessary, since the undervaluation of the CECO is no more alarming. Furthermore, the company seems to be finishing these difficult phases. Please check the following image and note that restructuring charges are diminishing:
Five: We did not appreciate the last annual results
After an impressive momentum seen in the last four years, the EBITDA, net income, and, most importantly, the Free Cash Flow declined. It was a negative surprise that, in our opinion, may be showing that the results of the hard work of the previous years are over.
We don't doubt that the company may be delivering better results in the next quarters. However, we believe that in terms of value, this is no longer a serious opportunity. We made a decent return and say thanks to the Board and the management. They did a terrific job and showed the market that they did not need a financial sponsor to run their business. But it is time to exit this company and look for other opportunities elsewhere.
In our view, the company is not at all in an overvalued territory, and the good earnings could continue for some time. However, the stock gains were fantastic, and we don't want to wait anymore to exit. The shareholders who opt to stay should check the next quarterly results. If the earnings keep losing momentum, stock declines can be expected.
For the next ride, please stay tuned, and click the follow button.
This article was written by
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