High Marks for Career Education

Shares of the for-profit education concern zoomed higher Friday after it issued an upbeat outlook for the year

Career Education (CECO) earned less during recent months, but investors bid up the stock anyway on May 4. The regulatory troubles that have challenged the for-profit education provider for years have finally begun to clear.

The Hoffman Estates, Ill.-based operator of 75 campuses worldwide earned $30 million during the quarter ended March 31, down from $52.7 million during the same period last year. While noting that the company has faced recent challenges, CFO Pat Pesch said in a statement May 3 that "positive forward-looking indicators and the satisfactory conclusion of several legal and regulatory matters demonstrate the company's progress in building long-term value for its stakeholders."

Investors seemed to agree. They bid up the stock more than 20% to $35.24 per share in afternoon trading on the Nasdaq.

To be sure, American InterContinental University, from which Career Education makes most of its profit, remains under probation for failing to comply with things like having qualified academic staff and relevant degree programs. AIU's accrediting body, the Commission on Colleges of the Southern Association of Colleges and Schools, said in recent months that the probation lasts until the institution's next review in Dec. 2007. This could lead to the government revoking the firm's ability to obtain federal financial aid loans for its students, which would be detrimental to its business, Morningstar points out.

Meanwhile, students have been watching the negative news headlines and enrolling elsewhere. Career Education had 24,000 new students starting in the first quarter this year, down 10% from the same period last year.

But Career Education's other regulatory troubles are finally getting resolved. The company said Apr. 20 that the Justice Department dropped an investigation first disclosed in 2004, involving allegations that Career Education schools may have submitted false claims or statements to the U.S. Department of Education. The DOJ finally ended up deciding not to take action against the company.

Career Education had also been restricted from acquiring schools or opening U.S. campuses since June, 2005. But the U.S. Department of Education finally gave a reprieve in January, and Career Education expects to open International Academy of Design and Technology campuses in San Antonio, TX and Sacramento, CA in late spring 2007.

"On top of what we view as improving operating trends, we think CECO is taking proper steps to get accrediting probation lifted in next review in late '07," Standard & Poor's equity analyst Michael W. Jaffe said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

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