The stock price for Career Education Corp. (CECO) cratered today, going into a free fall after the announcement that its President and CEO Gary McCullough has resigned, the release of a profoundly negative quarterly report, and the revelation that many of their schools are failing to meet federal standards for job-placement rates.
McCullough Out, Lesnik Interim Chief
Career Education’s Q3 report offered little hope for shareholders. Career Education, whose institutions include American InterContinental University, Brooks Institute, and Le Cordon Bleu North America, reported a net income of just $10.6 million, or $0.14 per share. This is a substantial drop from last year’s $0.33 EPS and it’s well below the analyst expectations of $0.34 EPS from a Thomas Reuters survey. Operating margins were cut in half year-over-year to 3.7 percent, and the company saw new student enrollment drop 22 percent. The Q3 report included the results of an external investigation into its health education and art and design schools that showed a failure to meet accreditation standards in 2010 and 2011 due to errors in records for the job placement rates, including reporting jobs for graduates that lacked appropriate documentation. As a result, of the 49 schools Career Education operated in health, art, and design fields only 13 managed to reach the 65 percent placement rate standard.
The litany of bad news was too much, prompting the change in leader ship and the ouster of McCullough. “Given the complexities of the regulatory environment and other issues that have arisen over the last year, Career Education is moving towards a new phase and the board views it as the appropriate time to start the process of putting in place fresh leadership at the CEO level,” said Steven Lesnik, the chairman of the board and new interim CEO.
For-Profits Troubled Industry
The scrutiny over Career Education’s recruitment practices represents an industry-wide change as regulators and lawmakers have responded to the growing industry. The Obama Administration introduced new rules in June that could pull government aid for programs that failed to meet new standards regarding job placement rates, levels of student loan defaults, and adherence to federal funding guidelines. The move was in response to the fact that federal aid money to the private sector had increased from $4.6 billion to $26 billion in the last decade.
The news of Career Educations considerable woes spilled over to the rest of the sector as most for-profit education companies saw their stock fall. DeVry, Inc. (DV) lost over 3 percent, ITT Educational Services (ESI) dropped nearly 6 percent, Lincoln Educational Services Corporation (LINC) plunged nearly 11 percent, and Strayer Education, Inc. (STRA) was down close to 4 percent. Industry leader Apollo Group, Inc. (APOL), managed to buck the trend, though, dropped less than one half a percentage point. Corinthian Colleges, Inc. (COCO), meanwhile, managed to post gains exceeding 9 percent, building on yesterday’s 14 percent spike for a three day surge of over 26 percent. Corinthian reported Q1 losses yesterday that exceeded expectations, but rosy outlooks, including predicted enrollment growth in 2012, managed to float the stock nonetheless.