Why Small-Cap Career Education (CECO) Doubled

NEW YORK (TheStreet) -- Career Education Corporation (CECO) surged 57% Friday to $5.947 after the college-level education services provider announced the sale of its European properties to private equity firm Apax Partners. At the time of the announcement, the deal was worth $305 million, surpassing the company's $255 million market capitalization.

Illinois-based Career Education stands to pocket $276.5 million from the transaction, expected to close by year-end, and plans to reinvest the bulk of those profits into its U.S. operations. The for-profit education provider has been victim to decreasing enrollments in previous quarters with total new student starts falling 25% in the three-month period to June.

"Redeploying capital from Europe to the United States is the right move for Career Education," said CEO Scott W. Steffey in a statement. "It will help us best serve the vast majority of our students, who are U.S.-based, and return the best value for our investors."

The European division generated $128.6 million in revenue for financial year 2012, amounting to 9% of the company's total revenue.

"The cash from the transaction will improve our options for accelerating future growth," added Steffey.

Wells Fargo upgraded the stock to "outperform" from "perform" on news of the transaction, and revised its price target to between $5 and $7.

TheStreet Ratings team rates Career Education Corp as a Sell with a ratings score of D. The team has this to say about their recommendation:

"We rate Career Education Corp (CECO) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis are as follows:

  • Net operating cash flow has significantly decreased to -$52.78 million or 6710.06% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • CECO has underperformed the S&P 500 Index, declining 14.76% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Diversified Consumer Services industry and the overall market, CAREER EDUCATION CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for CAREER EDUCATION CORP is rather high; currently it is at 58.84%. Regardless of CECO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, CECO's net profit margin of -10.64% significantly underperformed when compared to the industry average.
  • CECO, with its decline in revenue, slightly underperformed the industry average of 11.3%. Since the same quarter one year prior, revenues fell by 19.4%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

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