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Corinthian Colleges Inc.

May 04, 2012 | About:
GMI Ratings

GMI Ratings

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Investors dumped shares in Corinthian Colleges Inc. on Thursday, after CEO Jack Massimino announced lower earnings and warned analysts about more trouble ahead. The for-profit education company's obstacles underscore the importance of keeping an eye on the fallout from a scandal, which can remain unpredictable for years.

Massimino said Thursday that his company's income from continuing operations sank by around 33% to $12.5 million in the three month period ending in March compared with the same time last year. Meanwhile, Corinthian lost another $8.4 million from one-time events such as shutting down campuses. Expecting to face "a number of challenges," including the loss of federal funding for students who lack a high school diploma or GED, he forecast earnings between 10 and 12 cents a share in the quarter ended in June compared to 11 cents in the March quarter.

Corinthian has to convince students to enroll after months of embarrassing headlines. In August 2010, the U.S. Senate Health, Education, Labor and Pensions Committee asked Corinthian for information about things such as how it recruits students, sets prices, determines financial aid, and tracks attendance. For-profit companies have faced accusations since that their students account for almost half of all loan defaults, at the same time most of their revenue comes from federal student loan programs. "When students are enrolled through deception or fear, they are less prepared to meet the challenges of college," Senator Tom Harkin (D-IA) said of for-profit schools in a February 2011 statement, for example.

After such attentiveness from public officials Corinthian's shares, which traded at $10 apiece on July 27th, 2010, have underperformed the S&P 500 and dwindled to $2.90 per share intraday on Friday.

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For some, the possibility that Corinthian exploited some kids and bogged them down with debt is not part of the investment decision. Regardless, investing in Corinthian is foolhardy. Once a company gets into a scandal, the government becomes involved in its performance. That means Tom Harkin's outrage - and the funding that Corinthian loses because of it - is going to affect the success of the stock. Nobody can make an intelligent bet on Tom Harkin's outrage; probably he doesn't even know himself when and how that's going to hit.

The stock plunged nearly 22% on Thursday, in a reminder of how quickly everything can change.

One thing you can know: Corinthian's stock comes with the potential for surprises. Its AGR was a 6 in September 2010, indicating higher accounting and governance risk than the vast majority of companies. The score remained very aggressive until June 2011, when it was a 2. Since then it has improved to a 41, an average score that implies higher risk than 59% of companies.

GMI gives Corinthian an F on its corporate governance.

ESG Rating: F

AGR: Average (41)

Region: North America

Sector: Non-Cyclical Consumer Goods / Services

Industry: Personal Services

Market Cap: $ 315.4mm (Small Cap)


Rating: 2.6/5 (10 votes)

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