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Re Corinthian Colleges - The Case for Growth
Posted by: swnyc2 (IP Logged)
Date: September 10, 2013 09:07PM

Dear Batbeer2,

So, you think management is low-balling us for FY14 earnings?



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Re Corinthian Colleges - The Case for Growth
Posted by: batbeer2 (IP Logged)
Date: September 11, 2013 12:58AM

Ehm.... I have to confess I don't know what their guidance is. I tend to ignore that stuff.

If they guided lower than my estimate, then yes... I think they are setting an easy target.



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Re Corinthian Colleges - The Case for Growth
Posted by: swnyc2 (IP Logged)
Date: September 23, 2013 08:38AM

FYI, this article just out suggests COCO is a good short....

It's interesting to see how people can look at the same information and come up with diametrically opposed conclusions.

Batbeer2, I'm still not clear on what you mean by "I can see the profit slowly making its way to the bottom line..."

Compared to its industry pears COCO seems greatly undervalued on a Price to Sales basis...



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Re Corinthian Colleges - The Case for Growth
Posted by: batbeer2 (IP Logged)
Date: September 23, 2013 01:29PM

>> Batbeer2, I'm still not clear on what you mean by "I can see the profit slowly making its way to the bottom line..."

Short answer:

In the past year, they have grown revenue while shrinking the number of students. That means they've become more efficient..... but it has not worked itself to the GAAP bottom line (yet).

Long answer:

By my estimate, they are spending some $150m of what I would call "discretionary SG&A". I use the SG&A from back when they had the same number of students. Churn is down and there are now fewer at-risk students. All that comes out of overhead costs. Meanwhile they have administratively consolidated some of their schools so my estimate is probably conservative.

Since each school must be "certified" by at least three different regulators, the consolidation means you take out a huge lump of overhead. Of course, they didn't consolidate those schools until they were individually safe (or shut down). Now that they are well within regulatory limits, they can lump them together with little risk.

I could be wrong, but that is what I'm seeing and what I mean by "I can see the profit slowly making its way to the bottom line".

If I invert.... frankly I don't see how the ED or anyone else is going to put this company out of business. I would bet very heavily (I am) that they will be around in a decade. There just isn't an alternative. Seriously! Who is going to train all those dental assistants/mechanics/nurses?

I would ask anyone who thinks this company is going down:

- Is there a need for this type of tuition?
- If you believe COCO is doing a terrible job, who, as we speak, is doing it better?

The best businesses are the ones no one really wants/likes but serve a need.

QUAD / CONN / SEB / CRMT come to mind.



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Re Corinthian Colleges - The Case for Growth
Posted by: equitynovice (IP Logged)
Date: September 23, 2013 06:31PM

Hi Batbeer2, thank you for the in-depth analysis, write up and follow ups.

May be Andrew Rosen is biased, but here is a good read for why these schools will be around for a while.

[www.amazon.com]



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Re Corinthian Colleges - The Case for Growth
Posted by: swnyc2 (IP Logged)
Date: September 23, 2013 09:29PM

Dear Equity Novice,

Thank you for the Andrew Rosen reference. The excerpts were an interesting read.

Dear Batbeer2,

As always, thank you for the follow up!



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Re Corinthian Colleges - The Case for Growth
Posted by: batbeer2 (IP Logged)
Date: September 24, 2013 12:38AM

Yeah....I plan to read that book.

Arne Duncan (head of the ED), like Andrew Rosen is an interesting guy. He was mentioned in the book freakonomics (or maybe super freakonomics).

If memory serves he was responsible for improving the school (primary) system in Chicago. It is my understanding that when he cracks down on something he does so in order to make it better and only after he has analysed where the bad incentives are. He understands how to take bad incentives away and replace them with better ones.

In any case, Arne Duncan too plainly states that the for-profits serve a vital function.



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Re Corinthian Colleges - The Case for Growth
Posted by: swnyc2 (IP Logged)
Date: September 25, 2013 10:49PM

Question:
Over the last few years, some of the elite, private, not-for-profit schools have been expanding their offerings by starting new campuses in other countries -- and more recently by allowing outside students to take some of their classes on-line. While these schools are unlikely in the near future to offer the lower-level technical degrees that COCO offers, I have started wondering what would prevent a middle level private university from leveraging its better brand name and competing head-to-head with the for-profits, especially for those degrees where there is overlap?
One possible limitation is that the not-for-profit schools are less efficient and have a higher cost structure. However, the incremental cost of allowing additional students to take classes on-line should be rather small. Another possible limitation is that there are some regulatory issues that they are not set up to address.
However, I think this is a valid concern, especially since the reputation of for-profit schools has been sullied of late.



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Re Corinthian Colleges - The Case for Growth
Posted by: batbeer2 (IP Logged)
Date: September 26, 2013 01:04AM

Yes.

If one of the not-for-profits starts competing directly with COCO at scale, I would be worried. That is certainly something to watch. Good for students, bad for COCO.

Then again, if I were interested in doing what COCO does, I would certainly consider buying the company outright. Not-for-profits aren't necessarily irrational.



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Re Corinthian Colleges - The Case for Growth
Posted by: goorew (IP Logged)
Date: October 4, 2013 01:35PM

Hey Batbeer2, this is a good thesis and well articulated at that. You don't really talk much about the private loans issue, though. Just to recap for everyone, the government kept giving students more and more Title IV money, which put pressure on the 90/10 rule. So, in response, COCO increased tuition basically to the point where a student would get a lot of money from the federal government and that would equate to 90% or less of the tuition rate. Of course, this demographic can't really afford to fork over the other 10% of that tuition in cash, so they were getting private loans from companies such as Sallie Mae. S.M. then got out of that business because of high expected losses. And, in fact, nobody would really give those students loans. So COCO began giving the students loans for the other 10% themselves. Technically, they did this by having a third party bank issue the loans, and then another third party entity would buy those loans, with COCO paying a discount to the purchasing entity to reflect TMV and some risk. Most importantly, COCO would guarantee the loans entirely. COCO has said that they are forecasting expected recovery at the end of the day of 45-50% on these loans.

So that's kind of wordy, but IMO, this may be the single biggest issue facing the company. What do you think Batbeer2? I'm not an expert at looking at financial statements, so I have to confess that I'm a little lost here on a) how this looks in the financials now, b) what it will look like on the income statement and balance sheets over the next couple of years, and c) the effect it will have on FCF as well. What do you think? Similarly, what will FCF look like if we adjust that 45-50% assumption down or up?

Thanks.



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