UES Stock Still Haunted by Story on Student Aid

United Education & Software is getting a hard lesson on the difficulty of overcoming negative publicity.

The stock of fast-growing UES, an Encino-based operator of 33 trade schools and a school for home study, last week dropped below $10 a share, its lowest point since mid-January. This occurred at a time when the company’s profits had nearly tripled last year and are continuing to rise in 1988.

Money managers and analysts said the stock still is suffering from the fallout of a magazine article three months ago. The article, which raised questions about UES’ student-aid programs, sent the stock into a nose dive.

But the analysts also said economic factors are now helping to keep a lid on UES’ shares. The relatively low U.S. civilian unemployment rate--it dropped to 5.3% in June, its lowest level in 14 years--is seen as a negative for UES, because it might force vocational school operators such as UES to spend more on advertising and promotion to attract students.

That could eat into UES’ profits and “you can expect to see earnings not growing as quickly as they have been,” said Seth Feinstein, senior analyst at the investment firm Ladenburg, Thalmann & Co. in Los Angeles.

Rapid Growth

Whether that actually happens remains to be seen, of course. But the low jobless rate is still “a psychological reason” for investors to look warily at the stock, said Diane Jarmusz, portfolio manager for Oppenheimer & Co.’s Total Return mutual fund, which owns about 200,000 UES shares.

UES’ recent growth has been sizzling, thanks partly to recent acquisitions of more trade schools. The company’s revenue and profit have soared nearly sixfold since 1984. Revenue doubled last year alone, to $80.7 million in UES’ fiscal year that ended Jan. 31, and net income nearly tripled to $4.4 million, or 85 cents a share (adjusted for a 3-for-2 stock split April 14).

In its fiscal first quarter that ended April 30, UES’ profit more than doubled from a year earlier, to $1.1 million, and revenue rose 61% to $25.3 million.

But on April 25, Barron’s financial magazine reported that the California Student Aid Commission was reviewing student-aid programs at some UES schools for possible overfunding and excessive default problems.

The commission guarantees, on behalf of the federal government, loans to students made by private financial institutions such as banks. About 90% of UES’ students receive financial aid, and 20 of UES’ schools are in California.

Repayment Possible

More importantly to UES stockholders, Barron’s said that at the worst, the commission could shut down a school as a result of its review, or at the least, require UES to repay the financial institutions that had made loans to students whose borrowings exceeded their eligibility.

Barron’s admitted that “the scope of UES’ difficulties isn’t known,” and quoted UES President Aaron Cohen as saying the review was routine. But investors weren’t mollified.

On the day the story appeared, UES’s stock plunged 20% to $12.625 per share in national over-the-counter trading. It was an unaccustomed reversal for the stock, which had soared 142% in 1987--making it the top gainer among Valley-based companies--and had climbed an additional 75% in this year’s first quarter.

Two days after the Barron’s story appeared, Samuel Kipp III, the commission’s executive director, issued a statement saying the review was routine and, at that point, had “revealed no serious problems” at the schools. Past reviews of UES also “have not resulted in any significant financial liability by UES,” and the commission does not have the authority to close a school, Kipp said.

The current review is continuing and no conclusions have been announced, commission spokesman Dan Parker said Monday. UES President Cohen was not available for comment.

In any case, the timing of the Barron’s article was costly for UES. The company had planned a secondary offering for early May, whereby UES would sell 1.47 million additional shares to the public, and one of UES’ big stockholders, StanChart Equities, an affiliate of Union Bank, would sell 341,689 UES shares.

Feinstein of Ladenburg, Thalmann said “there was not a doubt” that the stock could have fetched $15 a share had the article not appeared. “The Barron’s article came out and people got cold feet,” he said.

The stock offering went ahead in early May, but was priced at $11.50 a share, so UES took in about $5.2 million less than what it would have raised under Feinstein’s estimate.

Many money managers such as Jarmusz remain upbeat about UES’ prospects. The stock closed Monday at $9.375 per share.

But as the Barron’s article showed, UES’ strong performance can quickly be overshadowed by outside events.

David Butterworth, who follows UES for Wedbush Securities in Los Angeles, said he does not expect the state’s review to trigger significant financial problems for the company. But he added, “The lack of a resolution is fuel for the fire.”