CECO Offers An Excellent Value Opportunity
December 1st, 2010 by Anatolii FesiukBy Anatolii Fesiuk
Consulting Equity Analyst
Super Stock Screener
Career Education Corp (CEC) – Valuation Analysis.
Company Description:
Career Education Corporation (CEC) includes the colleges, schools and universities that are part of its family. CEC offers education to a diverse student population of over 116,000 students worldwide in a range of career-oriented disciplines. Approximately 90 campuses that serve these students are located throughout the United States, France, Italy and the United Kingdom, and offer doctoral, master’s, bachelors and associate degrees and diploma and certificate programs. Nearly 40% of its students attend the Web-based virtual campuses of American InterContinental University, Colorado Technical University, International Academy of Design & Technology and Le Cordon Bleu College of Culinary Arts. The Company is organized in six segments: university, culinary arts, health education, art and design, international and transitional schools. In April 2010, the company acquired the International University of Monaco (IUM), an international business university.
Balance Sheet Analysis
* Career Education Corporation uses little debt in its capital structure. The debt-to-capital ratio is 0.23%. It is a good sign of stability and gives us more reasons to classify this stock as low risk investment.
* 35% of the company’s assets are intangible assets and goodwill. This is normal for educational companies and gives additional cash flow because of depreciation.
Valuation
Let’s look at the firm’s free cash flow:
In the first 3 quarters of 2010, free cash flow per share was $1.67. At this rate, if the company continues to perform well until the end of the year, its FCF will reach $2.23 per share.
30Y US bonds now can give nearly 4.3% return on investment. To avoid risk of bonds yield fluctuation let’s assume that the percentage is larger and equals 6%.
According to the classical stock valuation model, CECO is valuated at = $2.23/0.06 = $37.17
That means if the company continues to generate cash flow, on this level the real value of this stock equals $37.17 which is nearly two times the current price.
Lessons from the past
We estimated CECO is valued at a price of $37.17 per share. Logically this method of stock price estimation must work with data from the past. Let’s analyze this:
In this table we take cash flow and interest rates for each period and then estimate the stock price for the next period. We then compare estimations with the actual stock price. Our estimate was wrong only for 2008, in all other years the estimated price is less than the max price achieved for period, implying we had a chance to sell the stock at the desired price. Based on this information , we can assume that price will likely reach the $37.17 level.
Short selling
The short ratio for CECO is 5. It means that all shorts can be closed in 5 days on average volume. I think this is an additional argument to buy for two reasons:
- The short ratio is not very high, indicating bears are not dominating this stock.
- If “short sellers” start closing their positions, the stock will experience several days of significant buying activity, which can push it up.
Catalyst:
There are a million reasons for insiders to sell stocks and only one reason to buy. A lot of directors of the company are buying this stock now. The last and largest purchase was made by Chookaszian Dennis, he bought 7000 shares at $17.50, that means he spent $122,500 on that trade. I don’t think anybody will spend that sum of money without a good reason for it. Currently, the price is $18.05, not much higher than $17.50, so everybody still has a good chance to buy. I have more good news for you, on a daily chart CECO formed multiple bottoms near the $17 level, so if the stock will decline it will likely bounce off the $17 again.
Click the picture to enlarge
This buy recommendation is also supported by Super Stock Screener’s Ranking System, which rates the stock as a Strong Buy. Interestingly, the criteria used by the Ranking System to make buy and sell decisions are a set of primarily fundamental factors not cited above.
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What is the enrollment data? Trend? What happens in a significant recession to enrollment?
Gary,
Thank you for your question. I’m sorry it took me so long time to answer it.
Students population is shown below (for the beginning of each year):
2006 – 94,100
2007 – 89,700
2008 – 95,500
2009 – 96,600
2010 – 116,800
All data has been taken from CECO’s annual reports.
As we can see the student population trend is positive, same as free cash flow trend. In the crisis period the company slowed a little bit but not significantly.
Feel free to ask me other questions.
I am also bullish on for-profit education, specifically COCO. My blog, linked above, gives my fairly extensive long thesis.
In valuing a stock, I’m not sure I understand the value of capping FCF at a risk free rate. CECO isn’t a risk free investment and no one would think it is. Is this to try to set a ceiling for the stock? A better valuation approach, I think, would be to look at historical multiples.
Hello Chris!
Thank you for your question.
We don’t use the risk free rate in this article. Rather, we use a “safe” rate which implies an interest rate that even the 30Y bond won`t reach anytime soon. We have a historical table that shows “safe” interest rates as a good instrument for measuring value.
What rate do you use in your research?
CECO has a support level at around $17, but the trend doesn’t look so nice now. I would buy it when it approaches the support or when it breaks the current resistance.
Quick CECO Analysis
CECO lost -0.86% on 12/15/10 and a toal percentage of -2.39% in the past 2 days
CECO is trading in the range of $16.62 – $20.53 in the past 30 days.
The 22-day exponential moving average is moving up for CECO.
Money Flow Index (MFI) is bullish and moving up for CECO.
The 10-day simple moving average is bullish and moving up for CECO.
CECO formed a bearish Stochastic Crossdown signal.
Average volume decrease over 5% for CECO.
Hello Tim!
Thank you for your question.
I agree with you that it would be preferable to buy near $17 level.
I used price $18.05 in this article for my calculations.
I want to admit that on 3-d of December (after this article was written) Director of CECO Lesnik Steven bought 2500 shares at price $18.26, that means all prices lower than $18.25 is good for purchase.
What period do you use for Stochastic?