On Tuesday, August 26, before the market opened, Corinthian Colleges Inc. (COCO) reported a fourth-quarter loss of $0.01 per share or $620,000 on $274 million in revenue vs. a loss of $0.10 per share or $8.756 million on $231.62 million in revenue a year ago. Excluding the fees, COCO would have earned a profit of $0.11 per share. For the full fiscal year 2008, COCO earned $0.25 per share or $21.3 million on $1.07 billion in revenue. Shares opened lower at $15.58 and sold throughout the day to close at $13.09, down 19.3% on 11.16 million shares.
COCO expects first quarter 2009 earnings of $0.06 – $0.08 on revenue of $285 million – $290 million. Analysts expect earnings in the high range of $0.8 and below the company’s forecast of $283.3 million. For the full fiscal year 2009, COCO expects earnings of $0.58 – $0.63 per share on $1.21 billion – $1.25 billion in revenue. Analysts expect earnings below the company’s guidance of $0.55 on $1.22 billion in revenue.
Student enrollment increased 7,879, up 13% to 69,211 students for the fiscal year and for the fourth quarter, enrollment increased to 2,372, up 11.5%, to 23,015 students. However, students with lower credit scores had a difficult time obtaining student financing. Student loan defaults increased to 9.1% vs. 6.2% a year ago and increased expenses to 61.1% of income vs. 59.6% in the fourth quarter of 2007.
COCO also reported a loss from discontinued operations of several closed/sold branches in Canada, Boston, MA, Oakland, CA, Atlanta, GA, Everett, WA and Lynwood, WA. The loss amounted to $5.4 million. The Atlanta branch closed due to crediting issues and a loss of $4.8 million in student loan receivables at the Marietta and Jonesboro, GA Atlanta branch. This was not the only time COCO had problems.
In July 2007, COCO settled with the California Attorney General by paying a $6.5 million fine and closing 11 programs on 9 California campuses. In October 2007, the Dept. of Education served a search warrant on the COCO campus in Ft. Lauderdale, FL to acquire numerous documents and records. In November 2006, the SEC reviewed the stock option backdating cases and has not proceeded with enforcement actions since.
On Monday, August 25 (the day before earnings), Sallie Mae (SLM) announced that it will no longer offer “serial” subprime student loans. This is bad because SLM loans make up 90% of COCO’s private loan portfolio in the US, of which were subprime in 2007. In addition to SLM, College Loan Corp. and Student Loan Express have reported that they will no longer offer loans. subprime for students, which went into effect in March. As a result of the SLM decision, COCO instituted the new ACCESS student loan program, and together with Title IV and cash, COCO was able to arrange financing for the vast majority of students.
The Higher Education Act, signed into law by President Bush in July, helped COCO meet the requirements of the 90-10 Rule, which requires that at least 10% of an institution’s income, in cash, come from sources that are not Title IV. 2 rule changes were made this year:
1) A school may count as non-Title IV income the portion of any unsubsidized Stafford loan received by a student that exceeds the maximum. amount of the loan under the law prior to July 2008, and
2) A school may count institutional loans as non-Title IV if
a) the loans are based on callable promissory notes,
b) loans are issued at enrollment intervals, and c) loans are subject to repayment and collection.
The rule helped take pressure off COCO by helping the company meet the requirements without raising prices.
The outlook for this industry is neutral to negative. Given the economic downturn, I believe many students, especially subprime loan recipients, still cannot adequately qualify. Those who qualify are more likely to be unable to repay the loan on time, even with special loan programs available. However, a rise in unemployment may spur enrollment of people looking to learn additional skill sets. A wave of regulatory investigations into unsound business practices and the continued unavailability of credit should hit the entire industry.
Currently, 12 firms post recommendations for COCO, with 5 “Buy” ratings and 7 “Hold” ratings.
On August 18, Lehman Brothers reiterated its “Overweight” rating and RAISED its price target from $16 to $18! (That’s not gonna happen). Insiders have a pretty good track record of when to buy or sell. During the last 12 months, insiders bought 25,500 shares and sun 183,112 shares. The shares were sold from September to December, just before the shares went from $18 to $8. Purchases were made in May – June at $11-$12. COCO was trading at $13.27 as of Friday.
Technically, COCO formed a large breakout gap, which in this case signals the start of a major downtrend. The gap formed on high volume and the 50-day MA also failed, and has now become a confirmed short candidate.