12 Oct BUY: CAREER EDUCATION CORPORATION (NASDAQ:CECO)
I bought 2000 shares of CECO at USD$10.42/shr. costing about CDN$26,065 or about 2.8% of the portfolio. This is a much smaller position than a couple of the larger ones such as HOV (26%) and GM (9%). This is a toe in the water, so to speak. I really like the business – I’ve followed CECO for nearly 5 years and have owned it on at least one occasion at around $3.50/shr. CECO is a for-profit University in the US; the corporation owns two major schools in the US, American International University and Colorado Technical. The Obama Administration took a very skeptical view of many in the for-profit industry, particularly as reports surfaced that the schools had tricked prospective students in believing some of their courses were worth much more than they were. Since the US government funds about 90% of the students in the form of interest-free study loans, they were very disappointed to learn that the degrees these students paid thousands for had no career prospects at all, and therefore no way to repay the loans.
Fast forward to 2017, several high-profile schools (for example, ITT Education, Corinthian Colleges) lost their Education Department status and their students were unable to obtain loans from the Feds. As such, the schools closed. The survivors, quickly caught religion and closed any of their Schools who offered crappy courses and at the schools they kept, dramatically altered the coursework to ensure better outcomes. Gone were schools like Cordon Blu (a culinary school). Problem is, the schools have already taken the money for programs they want to cancel. As such, the Schools need to “teach out” the programs….basically pay the teachers, keep the school’s physical locations and pay all the costs without bringing in any new students. As such, in years 2 and 3, the schools get killed – it’s all expenses and rapidly declining revenues. Happily, this all started a few years ago. CECO dropped from $60 to $3 in a few years and since touching its low a couple of years ago, has slowly been on the mend, as the business has stabilized.
I like CECO now because AIU and CTC are both adding students, and the programs they offer are relevant. CECO has about $2.50/shr. in net cash and will earn about $1.20/shr. in pre-tax income this year. The reason the share price isn’t at $20 is because there are still concerns that US Politicians will cut these schools access to student loans (still representing 90% of student funding). It’s possible but I think the school’s best days are ahead of it. The last time I looked, the economy is very dynamic and the workforce is constantly challenged to upgrade. I think the for-profits are very responsive and I expect them to continue to quickly latch on to new programs of interest and put the bums in the seats. And, so coming back to why I only allocated 3% to this one, it could see $3/shr. if the US Government proves me wrong.