One of my favorite value-turnaround plays, Career Education Corp. (NASDAQ:CECO) recently reported full-year and fourth quarter 2013 results that beat Wall Street expectations. However, aside from beating Street expectations, these results showed that Career’s management is making solid progress in bringing the company back to health, underlining the company’s recovery potential.
I first picked up Career Education Corp. (NASDAQ:CECO)’s turnaround story in October of last year, when the company’s shares were trading at around $3.10. Since then, Career has announced a game changing deal to sell its European operations for what was at the time, more than the entire market capitalization of the company. This deal has been followed by this impressive looking set of fourth quarter results and improving outlook. All in all, since my initial recommendation back in October, the stock has surged 137% to $7.35, although this is just below the 52-week high of $7.81.
Career Education’s impressive results
For the fiscal fourth quarter of 2013, Career Education Corp. (NASDAQ:CECO) reported revenues of $247.1 million and a net loss of $30.6 million, or -$0.46 per diluted share, a significant improvement on 2012’s fourth quarter result; a net loss of $61.5 million, or -$0.93 per diluted share on revenues of $303.3 million. For the full year 2013, the company reported total revenue of $1.06 billion, a net loss of $164.3 million, or -$2.46 per diluted share. Unfortunately, this was worse than the net loss of $142.8 million, or -$2.15 per diluted share, reported for the full year 2012 on revenue of $1.34 billion.
Nevertheless, the company is making important progress in other areas. For example, operating costs continue to decline dropping by $59.0 million in the fourth quarter and by more than $200.0 million for the full year. Additionally, net cash used in operating activities was only $8.0 million during the fourth quarter, versus $10.9 million in the third quarter and $52.8 million in the second quarter — so the company’s cash burn has slowed, giving it more time to restructure and return to profit.
Further, Career Education Corp. (NASDAQ:CECO) reported a slight uptick in the number of students enrolling for some of its courses in the fourth quarter, seemingly putting the brakes on several quarter of consecutive enrollment decline. New student enrollments for Health Education and Design & Technology classes jumped 21% and 12% respectively year-on-year in the fourth quarter. However, overall new student enrollments declined 16% year-on-year. Still, rising student numbers in some classes is a slight improvement.
Is Career still a value play?
Overall, Career Education Corp. (NASDAQ:CECO) has slimmed itself down, reduced costs and sharpened its focus on the US’ domestic education market during the last year. Still, while good progress has been made turning the business around, Career is now a smaller operation than it was when it first appeared on my value screen. Additionally, after the recent rise in the share price, it remains to be seen if Career’s margin of safety that was present when justifying the initial investment is still in place.
In particular, Career Education’s book value per share has dropped to $6.80, from $9.24 reported at the end of 2012, although total cash and cash equivalents and short-term investments are currently booked at $5.42 per share. What’s more, Career has no debt and current assets cover current liabilities 2.2x. So all in all, there is not much risk here, a well-capitalized company like Career is unlikely to disappear overnight and with cash burn falling to $8 million a quarter, the company has plenty of cash to instigate a turnaround. On that basis, as a turnaround play, Career still looks attractive.
This being said, with the number of students enrolling at Career’s facilities continuing to decline, and the company now trading at a premium to the value of its assets, Career Education Corp. (NASDAQ:CECO)’s margin of safety for value investors has disappeared.