Friday, FBR Capital Markets initiated coverage of Career Education Corp. (CECO) stock with an Underperform rating and a price target of $22.
Analyst Matt Snowling noted that although management has accomplished much, the turnaround story is beginning to stall. The analyst believes that CECO faces challenges from proposed changes to enrollment-based compensation rules, statutory limits related to Title IV funds, elevated student loan defaults, and restrictions imposed by accrediting agencies, which, combined, will likely restrict enrollment growth or raise operating costs.
Arguably, with CECO trading at 5.0x EV/EBITDA, the market is discounting much of the risk. The analyst's bigger concern is Career Education's relative market positioning that is concentrated on countercyclical programs and faces increased competition from the commoditized online education marketplace.
Due to the aforementioned issues, the analyst is forecasting declines in both enrollment and earnings for 2011, and although the company's cash flows and balance sheet should provide some support to the stock, he believes that the shares are likely to underperform their peer group.
Currently, CECO is down $0.29 or 1.20% and trading at $23.95.
For comments and feedback: editorial@rttnews.com