Analyst Blames Recent Acquisition Binge : National Education Signals Drop in Earnings
National Education Corp. in Irvine said Monday that it anticipates a substantial drop in second-quarter sales and earnings, compared to the same period a year ago.
After the announcement, National Education stock lost $3.625 per share, or 18.5% of its value, closing at $16 in heavy volume of 818,000 shares traded on the New York Stock Exchange.
The firm, the nation’s largest educational-training company, said that profits would drop because its Applied Learning International subsidiary, which recently went eight months without a chief executive, has not met sales expectations.
As a result, the company could earn as little as $3 million for the quarter, compared to $7.2 million in the same period a year ago, according to Douglas M. Arthur, an analyst at the New York brokerage firm of Kidder, Peabody & Co.
Analyst Bert Boksen of Raymond, James & Associates in St. Petersburg, Fla., said negative effects of National Education’s recent acquisition binge are beginning to surface.
The wave of acquisitions began in 1986 when National Education acquired Deltak, an Illinois data-processing firm. In 1987, National bought Advanced Systems, an Illinois-based provider of consulting services and training products. It combined Deltak and Advanced to form the Applied Learning subsidiary, a $180-million-a-year business. Last year, Applied Learning acquired Spectrum Interactive, a developer of corporate educational programs.
“I expected it to catch up with them, but I didn’t expect it to be this fast,” said Boksen, adding that National Education may have overvalued Advanced Systems at the time of its purchase.
Boksen said National Education benefited from its acquisitions last year when it reported record earnings of $46.1 million and revenue of $457.5 million.
But the torrid sales pace that produced a number of long-term contracts last year couldn’t be sustained, he said.
Analysts said that before National Education can begin increasing sales and earnings again, it must put some troubles behind.
Among them, according to Arthur:
- An incorrectly structured sales effort. When Applied Learning was formed, the sales efforts of the subsidiaries were consolidated into a national operation. While this has reduced costs, analysts said, it has sometimes been ineffective in getting new business. Company spokesman Jerry Derloshon acknowledged that the structure has had its drawbacks and that the company is now realigning its sales operation.
- Ineffective record-keeping at Applied Learning. Derloshon said the integration of the record-keeping of three companies into one has not gone as smoothly as expected. He said most of the needed improvements have been implemented.
- Applied Learning has had difficulty expanding into new markets. The subsidiary, widely recognized in the data-processing industry, is not as well known in other industries that rely on corporate training and consulting. The company also sells a large volume of training videotapes but has been less successful at marketing consulting services. Derloshon said that by marketing a broader array of training products and consulting services, the amount of time it takes to make a sale has been lengthened, which has added to the sales slowdown during the quarter.
- A loss of top managers. In March, Jerry Cwertnia resigned as National Education’s president. In September, 1988, Applied Learning chief William Roach resigned. Also last year, Chairman John J. McNaughton, who founded National Education in 1977, retired at age 65 and was replaced by H. David Bright.
The Applied Learning post, temporarily held by Bright, was filled only three weeks ago with the hiring of Kenneth Riedlinger, a former Ford Motor Co. executive.
Bright, who also took over duties as National Education president upon Cwertnia’s resignation, has said he has not made plans to hire another president for National Education.
“His attitude is that National Education has become a holding company of sorts, and he wants top operating people in the operating subsidiaries,” said Clarke L. Walser, an analyst at Chicago Corp, an Illinois brokerage.
But Boksen said that Bright is being overworked and that the company is now thin on top management.
Boksen, who first warned in March that National Education could hit an earnings snag, said he expects the company’s 1989 earnings to remain below last year’s levels.
But he and other analysts say that National Education has the ability to turn its operations around and that they expect it to reverse the downturn.
