Thursday, June 22, 2006

Concorde Career Colleges-Another One Bites the Dust

As you know, I have been positive about the education stocks despite a litany of problems. In particular, my choice has been Career Education (CECO) which has had a number of significant legal issues clarified in the last few months.

Please check these past posts:

Getting an Education in Education Stocks

CECO Revisited-The Clouds are Parting

CECO- Are the Storm Clouds Back?

Company specific risks have held back the valuation. Yet, the industry has been replete with these issues which have affected some of the currently most admired companies (translate- currently most expensive) in the past.

Yet, given the somewhat predictable nature of the revenue stream, and the relatively low capex to support the business, private equity investors have taken notice. This is a business where you get paid before you provide the service, a darn good business model when you think about it. Sure makes working capital less of a concern. You get Title IV funding as financial aid so companies get 70-80% of their revenues backed by U.S. government funding. Not a bad receivable, in my view. Education Management which operates some 70 schools, was bought out for $3.4 billion by Providence Equity Partners and Goldman Sachs Equity Partners earlier this year.

This morning, Concorde Career Colleges (CCDC) announced that it had entered into a definitive agreement and plan of merger with Liberty Partners at $19.80 per share, a 34% premium to last night's close.

The $19.80 valuation suggests an EV/EBIT of 14.7 times TTM EBIT. On an EBITDA basis, the multiple of TTM EBITDA is 10.7 times. CCDC has returned about 20% on capital for the last twelve months. EBITDA margins in the last twelve months have been about 9% and operating margins have run at about 6.5%.

CECO, in contrast, has EBITDA margins of 21.5% despite its difficulties and diversions, twice the margin of CCDC. On the operating line, CECO operating margins are 17% on a TTM basis, again more than twice those of CCDC.

Investors don't seem to care. CECO closed today unch at $31.15. At this level, it is trading at EV/EBITDA of 5.8 times and EV/EBIT of 7.36 times both on a trailing twelve month basis. Return on invested capital for the last twelve months has been similar to CCDC, at 21.2% versus 20%. Given its higher EBITDA and operating margins, I suspect there may be some excess capital here. Should CECO trade at the valuation accorded CCDC, based on the EBITDA multiple, the value would be $57, and based on EBIT, about $62.

Given the increasing competition, I do not believe that operating margins will be what they were. I believe that growth rates will slow down. My valuation for CECO is consequently much more conservative in the mid to high $40's.

But I also believe that ongoing adult education and upgrading will be part of most people's future. Job hopping and skills building are an expectation for most of us. Even at my advanced age post 50, continuous learning is an expectation if not a requirement, even if self-imposed.

There is a terrific roundtable forum on education in the May 29th Wall Street Transcript. (Subscription required.) In it, you will find that the participants are a little less sanguine about the prospects for this industry versus my own largely on the basis of increasing share for non-profits versus the for-profit segments of the education market. As well, there is some useful insight into the issues of institutional accessability, affordability and accountability.

CECO continues to suffer some enrollment backlash from its regulatory problems both on campus and on-line. They remain constrained by the Department of Education from opening any new campuses or doing any acquisitions. AIU, their largest online platform continues to have issues with the State of California. But, at least in my opinion, most negative regulatory risks and outcomes are baked into the price.

Disclaimer: I, my family, and some clients have a current position in CECO. None of us has a current position in CCDC.


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