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Corinthian Colleges - The Case for Growth

November 26, 2012 | About:
Here’s an established, geographically diverse business with high margins, low cyclicality and a defensible market position in a rapidly growing industry. It trades at 2x FCF — a 50% yield.

There’s a very good reason for this. The market mistakenly believes the cash flow is unsustainable — this business is toast.

The Company

Corinthian Colleges Inc. is a large American entry-level, post-secondary career education company. The company serves some 100,000 students from 100 schools in the U.S. and 16 schools in Canada. Corinthian's top market is California (roughly 25% of total).

The main program area is health care. Other programs include criminal justice, business administration, information technology, vehicle maintenance and construction.

The company has 16,000 employees, including 6,000 faculty of which 1,750 are full-time.

The company was founded in 1995 and has been publicly traded since 1999.

Shares trade on the Nasdaq at $2.20, for a market capitalization of $185 million.

The Growth

Traditional, state-funded, colleges are turning away millions of students. Specifically for the health care industry, there is a massive, acute and growing shortage of trained professionals. Historically, health-care professionals were trained at state-funded community colleges.

While states are required to provide primary and secondary education to children, they are not required to provide post-secondary education to adults. As state budgets have come under pressure, this has led to a significant reduction of funding for community colleges.

In California alone, the state’s 112 community colleges have turned away 300,000 students since 2008. There are almost 2 million students within the California Community Colleges system training to be nurses, welders, auto mechanics, airplane mechanics and construction workers. New students were turned away for no other reason than the fact that the state’s colleges had insufficient funds and capacity.

As a result, students have no option but to take a loan from the federal government and enroll at one of a handful of schools that comply with the standards that make them eligible for title IV funding.

Why Has There Been No Growth Recently?

Until 2010, Corinthian Colleges basically signed up anyone and everyone. The government assumed adult students loading up on federal loans to pay for their tuition would work hard to get a diploma, land a better job and repay the loans. Government was wrong.

While it lasted, the for-profit institutions took the business. It was easy money. If students didn’t show up, the institutions could simply pocket a portion of the fees without providing a meaningful service.

Then, the Department of Education (ED) changed the rules. Now the schools are accountable for outcomes and the default rates on the loans. Any institution whose cohort default rate equals or exceeds 25% may lose participation eligibility in the guaranteed loan program. Its students will be denied access to the federally guaranteed student loan programs.

In response, Corinthian Colleges stopped enrolling at-risk students. The result is a step change in student population.

35024_1353958275vCUP.png

The at-risk students were replaced by an increasing number of quality full-time students who were turned away by the traditional state-funded colleges. Default rates on the loans have been decimated. There has been a dramatic improvement in the retention of students (57% to 80%). Less churn should have an impact on profitability going forward.

Now that the company has brought outcomes in line with the new rules, Corinthian Colleges can once again start enrolling the growing number of students that are being turned away from state-funded schools. This market opportunity is many multiples of current revenue.

Management

In November 2010, Jack Massimino returned as CEO to whip the company into shape in response to the new regulatory environment. Prior to this re-appointment, Massimino served as chairman of the board. Jack Massimino had previously served as CEO from November 2004 until July 2009.

He took on a lot of extra work. He took on some extra responsibility. He declined to take a raise.

35024_13539582761QOP.png

Much of the incentives came in the form of stock options. They have double-digit strike prices. Massimino stands to lose millions of dollars unless the company’s stock trades at double-digit prices within a few years.

As is usual, the board has set minimum stock ownership guidelines for the CEO. Massimino is expected to own an amount of stock worth at least 3x his annual salary.

Including the options, Massimino owns 2 million shares (2.2%). At current prices, that’s roughly 5x his base salary. Nevertheless, like other insiders and most recently Ruane Cunniff, he is accumulating more stock.

Specific Risk

Market risk. I was bullish on this stock at much higher prices. The thesis then was that the company should be able to earn 55 cents per share, assuming the company could stabilize its student population at 100,000. After two years, I stand by that thesis. As is my experience with any stock I like, the mere fact that I believe it’s a bargain doesn’t prevent the market from cutting the share price in half.

Political Risk. It is a popular pass-time for members of congress to bash for-profit institutions. A lot of proposed legislation is leveled at the for-profits while ignoring the inefficiencies at the traditional (not-for-profit) state-funded colleges. Some of this stuff may actually stand up to the scrutiny of the courts.

Compliance. COCO needs to comply with a lot of regulations. Including the new regulations from the ED. Many of COCO's programs are less than one year. Unlike the competitors offering multi-year programs, they can react quickly. They can test new programs and teach-out underperforming ones in months. That is precisely what they are doing. Of course, the regulations also form massive barriers to entry. There is a reason most of the traditional colleges don't apply and their students have no access to the federal loans.

Corinthian has been operating succesfully in Canada (Ontario) for many years. In Ontario, the Ministry of Training, Colleges and Universities has a policy whereby the government will only guarantee defaulted student loans to a certain capped amount (25%), beyond which the applicable private career college is responsible for guaranteeing repayment. This is much tougher than any of the new US regulations but it does not prevent Corinthian from making money in Canada.

Value

Back in 2010, I estimated earnings power of $50 million on a hopefully stable student population of 100,000. That’s a profit of $500 per student, or $0.55 per share.

Over the last 12 months, the company generated $100 million of FCF ($1,000 per student) while its student population grew. As we have seen, churn has declined. The company is retaining its students. This should have a positive impact on both the student population and administrative overhead going forward.

Since 2010, the company has:

  1. Shed some $200 million of goodwill.
  2. Depreciated PP&E at $75 million per annum. That’s pretty steep for PP&E with a book value of $600 million.
  3. Spent the better part of $200 million on capital expenditures. Again, they did that on property that was worth $600 million to begin with.
The non-cash charges cause GAAP earnings to temporarily understate FCF and IMO owner earnings too.

Based on the information available today, I believe my estimate of earnings power of $0.55 per share is still pretty pessimistic. Current FCF points to a figure that’s twice as high.

Disclosure

This is not a recommendation to buy or sell anything. I own shares of Corinthian Colleges Inc. and the Washington Post company. I have no position in any of the other stocks mentioned.

Any and all questions welcome as usual.

Read more

Community colleges turning away students

Community colleges failing to train nurses despite heavy demand

Bill Gates talks about education and state budgets

A feeble attempt at a writeup (2010)

Recent Proxy

Recent 10q

Bill Gates talks some more.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.9/5 (48 votes)

Voters:

Comments

jasonfrey33
Jasonfrey33 - 2 years ago
Thanks for the article. I am reviewing the regulatory compliance. Last reported 3 year default rate at 27%, I know they expect improvement in 2012, but this is a high rate. I believe they also have 35/101 campuses not at gainful employment placement rates goal. COCO also has 328 million in guaranteed 3rd party off balance sheet student loans. I would expect a high default rate on these loans, possible 100 mil of bad debt expenses going forward. The $37.6 mill in cash will help to cushion these loan losses along with any lawsuits they may face going forward. It would seem to me that the company is worth at least $400 mil. even if all the cash is used for lawsuits, bad debt expense. Why this stock over ESI, APOL or DV? I have reviewed STRA, they are still not cheap enough for my taste. EDMC has repriced all their options a few months ago, combined with the heavy debt load and variable rate revolving credit lines I would not touch them. CECO will likely burn through its cash this year to pay for campus closings. Still some potential in that company. Devry is in my opinion best buy for the price.

batbeer2
Batbeer2 premium member - 2 years ago
Hi Jasonfrey33,

>> Why this stock over ESI, APOL or DV?

Three reasons:

- I know more about COCO than about the others. I've been following it longer.

- They are at the entry level with programs typically lasting less than one year. This means they can react quickly to the changing environment by adjusting the composition of the student population.

- I already own Kaplan in that space.

At the end of the day I believe a collection of schools with 100,000 students, each paying about $15,000 per annum to get an education, should be worth a bit more than $2000 per student. Especially if the number of students is growing.

buynhold
Buynhold - 2 years ago
Batbeer,

Thanks for another interesting writeup! Couple of thoughts:

1) Isn't current owner-earnings more like $50 mil or so, once you take out the unlikely to be repeated working capital improvements (they detracted from FCF last year, look at these over a few years and you'll see)?

2) Here's an article on a big reason behind the default rates going down:

http://higheredwatch.newamerica.net/blogposts/2012/the_real_story_behind_corinthian_colleges_plummeting_default_rates-72503

If this is indeed the case, it could very well be that the improvement isn't sustainable over time, maybe just long enough for Massimino to cash in on his stock options (i.e., a cigar butt investment) :)?

varunfriend
Varunfriend premium member - 2 years ago


Capella (CPLA) is another interesting company - its a regionally accredited, exclusively online postsecondary education company. It offers bachelor's, master's, and doctoral programs in behavioral health and human services, business management and technology, public service leadership, and education. More than 80% of students are enrolled in master's or doctoral programs. Capella serves roughly 39,000 students.

No debt

Generate abt 1180$ FCF / student

Almost $10 / share in cash

FCF / share = $3.6

FCF Yield = 13%

The risk with for profit sector is regulatory and in the present polarized environment looking for scapegoats that could be the telling factor in terms of what happens in the industry.

Another way of playing this could be to just buy the basket of for profits .. that will certainly do well over time.

batbeer2
Batbeer2 premium member - 2 years ago
>> The risk with for profit sector is regulatory and in the present polarized environment looking for scapegoats that could be the telling factor in terms of what happens in the industry.

Yes. They won't kill the for-profits though. In the end, the for-profit system is better for the budget.

- The federal government borrows money at 2% (10 year treasuries) and lends it to students at 3%.

- Students look for a school that caters to their needs (open market).

- The schools are responsible for managing the portfolio of loans and keeping default rates low.

- If they do all that and still manage to make a profit, the profit is taxed.

That is a lot cheaper than simply handing tax dollars to traditional community colleges and universities.

This driver is not going away despite a lot of noise by politicians. It's a good thing the government is regulating this industry but again, it is not going to kill it.

>> Another way of playing this could be to just buy the basket of for profits .. that will certainly do well over time.

Yes. For me, picking individual stocks keeps me honest (thinking and acting like an owner not a stock renter).
batbeer2
Batbeer2 premium member - 2 years ago
Hi Buynhold

Thanks for the kind words.

>> 1) Isn't current owner-earnings more like $50 mil or so

$50 million is fine by me. I've dug into the FCF more than I've talked about in the article.

Mine's a bit higher ($ 75m) because I think they've been spending a lot (more than run-rate) on Capex.

>> 2) Here's an article on a big reason behind the default rates going down:

I was aware of the article you point to. It neglects to mention retention is up (churn is down). That's not just paper trickery. It supports my thesis that the business has fundmentally improved.

From the article:

To accomplish a lower reported default rate, Corinthian hired three contractors. One was General Revenue Corporation, which devoted 60 full-time employees to call former Corinthian students who were late making payments but not yet in default. The company also hired two firms, ROI and TEAM Enterprises, to send out 30 or more people to knock on former students’ doors to secure ‘cures.’ This same document reveals that students in late stages of delinquency but not yet in default -- a period during which they are the biggest threat to Corinthian’s default rate – could be contacted up to 110 times per month. Another internal document shows that, in order to achieve the company’s desired default rate, the call center run by General Revenue Corporation would make between 2 and 2.5 million calls a year, or 429 calls per employee per day to former Corinthian students

So here we have a private company fighting to reclaim some of your tax dollars from people defaulting on federal loans. The author of that article thinks that's bad (unsustainable?). IMHO this is precisely how the broken banks should have managed their loan portfolio. Also, I presume Corinthian Colleges now has a pretty clear picture of who is likely to service their loans (or not). That's pretty valuable information when enrolling (or not) new students.

From the article:

A numbers game, indeed. By pushing former students to get forbearances and deferments on their loans, Corinthian has been able to artificially lower its schools’ rates and make sure that these institutions continue to receive hundreds of millions of dollars in federal student aid funds each year.

In short, even if you take a dim view of these practices (I think it's fine but that's just some Dutchman's opinion), the result supports the thesis.
jasonfrey33
Jasonfrey33 - 2 years ago
Regarding the 90/10 rule. Many for-profits claim they cannot lower tuition without violating the 90/10 rule. This creates an environment that fosters competition on items aside from price. My understanding is that a lower cost to attend a college would result in the student obtaining all funding from federal loans. A higher cost results in students meeting the cap on federal loans and forces the student to take out private loans in addition. It looks like the 90/10 rule protects non-profits and for profits from price competition. Thoughts?

batbeer2
Batbeer2 premium member - 2 years ago
>> It looks like the 90/10 rule protects non-profits and for profits from price competition. Thoughts?

Corinthian is lowering its tuition rates as we speak. As you point out, rates were previuosly raised to comply with 90/10. It seems they are happy with the 90/10 revenue split within the current student population. If they weren't, they wouldn't be lowering rates.

Schools have some operating leverage. Attracting 25% more students with 10% lower rates will always make business sense. Even for the public schools. For the for-profits, 90/10 will counteract that somewhat. The days of opening the floodgates are over.
buynhold
Buynhold - 2 years ago
>> So here we have a private company fighting to reclaim some of your tax dollars from people

>> defaulting on federal loans. The author of that article thinks that's bad (unsustainable?). IMHO this

>> is precisely how the broken banks should have managed their loan portfolio.

I would say the author there is correct in saying that the reported drop in default rates (from 25% to 3%) is not sustainable, since deferment will only prevent defaults where there is a liquidity problem (same goes for the broken banks - it won't fix solvency issues with the defaulters; IMO the banks should have made their bondholders take a haircut when faced with solvency problems (and not the taxpayer)).

However, I do agree with you that the information COCO gets through this process can be used to drastically (and sustainably) reduce actual default rates so they can keep qualifying for federal funds (without the need to play numbers games to satisfy changing regulations).

APOL has a similar valuation, and I really like the fact that the Sperlings own a huge chunk of it, but as you point out, COCO should be more nimble in the face of changing regulation. Tough call (for me!).
batbeer2
Batbeer2 premium member - 2 years ago
>> Tough call (for me!).

May you have lots of problems like that ;-)
jasonfrey33
Jasonfrey33 - 2 years ago
I see in the last conference call they got the private lenders to reduce the interest rates on student loans. In turn COCO made some promises to the lenders. Do you know where to find info on the new terms?

Quite a few student class action lawsuits pending. It appears that APOl had students sign an agreement upon enrollment to waive rights to such lawsuits. Have you accounted for a possible loss on lawsuits? If so how large, or do you feel current reserves are adequate?

With 37.5 mil in cash and a revolving credit line nearly maxed out, do you see a risk in obtaining additional credit if a large settlement is reached?

Are you concerned about current gainful employment compliance, or do you feel this will be resolved easily?

Just interested in a second opinion as these issues carry over to most for profits.

Great work and thank you.

batbeer2
Batbeer2 premium member - 2 years ago
Hi Jasonfrey33,

Thanks for your questions.

>> With 37.5 mil in cash and a revolving credit line nearly maxed out, do you see a risk in obtaining additional credit if a large settlement is reached?

No.

1) In a couple of years they've reduced debt from 300m to 100m. Obviously the debt capacity of the company is higher than the current load.

2) You'll notice they reported a high receivables balance. That's cold cash sitting at the ED that they've probably collected by now. Read the 10q for detail.

3) It may be class action but there are many variables involved. The class can't be very large (pun intended). You'll notice the average COCO school has 1000 students.....

These are adults who physically signed some important documents. They didn't succeed at their endeavors and they are blaming the school. Meanwile, it's not COCO that loaned them the money.

If I had to argue the case before a judge, I would go looking for someone who completed the course, fully cooperated with all the efforts of the school to help get a job and was clearly lied to before being enrolled. I doubt there are many of those.

Assuming you find 10 000 of them and they settle for an amount equal to triple the tuition fees they paid to begin with, the liability should be less than $150m. You must find them before COCO gets to them and offers to make their debt problems "go away" if they sign on the dotted line.


>> Are you concerned about current gainful employment compliance, or do you feel this will be resolved easily?

I'm not concerned.

1) COCO makes money in Canada where the rules are tougher. Why shouldn't they be able to comply in the US?

2) One court has overturned the new rules. IMO the rules are an improvement but I also think they're borderline in a legal sense. Party A borrows some money from B. Party C, who has no authority over A or C, is punished if A doesn't pay back. That's probably a pretty tough rule to uphold in many American courts if push comes to shove.

3) To me there's no question they can comply. They could shrink to half the student population - enrolling only the best of the best (lets call them AAA rated). At current prices you would still be looking at a cheap business. It's more a question of whether you believe management is knowingly running the business into the ground by continuing to enroll at-risk students. I don't believe that's the case.


>> Have you accounted for a possible loss on lawsuits?

Yes. I consider it immaterial to the thesis.

For anyone wishing to question the practice of accounting for an unknown liability, I refer you to a thread on WCG here: [www.gurufocus.com]

From that old thread:

Lets me put it the way Graham put it. Had you had the option of buying the rights to the settlement.... You would pay the state an X ammount and take over negotiations with WCG from there. What would that have been worth to you. 100 M ? 500 M ? 1000 M ? 50 M ?

No way would a reasonable investor have been willing to pay 500 M for the right to collect on any settlement or fine. Why then would those investors subtract >> 1B from the price of the company ?
batbeer2
Batbeer2 premium member - 2 years ago
@ Buybhold

I had a brief look at APOL. It's much cheaper than it was and the balance sheet sure is impressive. WOW.

I like the fact that Ruane Cunniff is buying. Yeah, that may be similar. I'll give it a pass because I already have Kaplan in that particular space.
jasonfrey33
Jasonfrey33 - 2 years ago
Thank you for the insights, especially the lawsuit perspective. Reverse engineering at its finest.

batbeer2
Batbeer2 premium member - 2 years ago
@ Jasonfrey33

One more thing.....

Imagine you are the lawyer working on this in California. You have hunted down a number of former students who all say they worked hard and were lied to so now they're jobless and penniless. You get 50% of any settlement (yeah you're that kind of lawyer).

As you are preparing for your day in court, you get a call from Ronald Olson (Tolles, Munger and Olson). Olson is a California Lawyer who just happens to sit of on the board of WPO who happen to own 11% of COCO. A stake they bought when Gates was on the board of WPO (Melinda). Unlike you, Olson has been in the the for-profit education business for a decade.

Olson is acting on behalf of COCO and has access to the files of all your clients from when they were at school.

How do you fancy your chances in court now?

Olson is offering $ 45m (remember, you get half). What are you going to do?

Just some fun and idle speculation..... couldn't resist :o)
batbeer2
Batbeer2 premium member - 1 year ago
The 10-q is out, shares are down.

The good:

- The company has eliminated some $100m of debt. I find it remarkable that the company trades for $ 200m while it has shown it is able to retire $100m of debt in six months (now down to $31m.)

- More students are staying longer. Churn has been further reduced. There may be fewer students (2% less) but more of them are studying full-time. For a given period, a full-time student brings in more revenue than a part-time student. As a result, revenue is up.


The bad:

- The number of students (excluding Quickstart) is down. There were still too many ATB students and the company had to shed a few. This is probably the number the market is focussed on.


The ugly:

- In November, the ED sent a letter in which they claim the company was not in compliance during 2011 (under the previous CEO). COCO may need to post a letter of credit to the ED to the tune of $175m.

I cannot imagine the ED denying COCO's students access to title-IV (pulling the license) for being out of compliance in 2011 (they are in compliance currently). A lot of aspiring nurses and medical assistants will have no where to go if the ED does that. Having said that, it is an ugly possibility.

If push comes to shove, I believe COCO could come up with $ 175m. They've serviced higher amounts of debt in the past. Nevertheless, this issue is pretty ugly and could become uglier.
blainehodder
Blainehodder - 1 year ago
It is absolutely absurd how cheap this is. I am stepping in here at 2.30.

I don't think the ED is going to pull the title IV funding over a write-down of goodwill. COCO is fully in compliance for 2012 and is even in compliance under the EDs (asinine) ruling with the restated results.

The rest of the lawsuits seem to be a joke.

The industry has taken an unbelievable beating and has been completely written off as a poor idea by many (even value investors) as people refuse to sit on MTM losses, and refuse to catch falling knives.... but this is blasphemy to me. True Grahamites should look past the fibbonacci spaghetti spiral technicals, and peer through the shroud of uncertainty.

What isn't to like? The company has a great 2 step catalyst including ED reversal on Financial Responsibility compliance for title IV, and of course the inevitable buybacks. The company's trading price relative to normal earnings power is just too cheap to ignore. Barring a complete distaster in the appeal process forcing an LOC raise, this can easilly trade for many multiples of the current price.

Great analysis and writing Batbeer2 as usual! Lets hope we aren't wrong.
batbeer2
Batbeer2 premium member - 1 year ago
Thanks for the kind words.

I'm heavily invested here.
longleaf
Longleaf - 1 year ago
Hi Batbeer2, I am debating if APOL and COCO are value trap rather than value investing within 5 years from now. Both of them heads 5 years low. Do you think they qualify for " Cigar-Butts" or "Buffett-Munger"? Since federal funding is shrinking for long run, can you highlight the key factors that will boost both companies to recover the revenue and margin stream eventually? Or they are just net-net bargain candidates ?
batbeer2
Batbeer2 premium member - 1 year ago
Hi Longleaf,

I like your name.

>> Do you think they qualify for " Cigar-Butts" or "Buffett-Munger"?

Both


>> Since federal funding is shrinking for long run, can you highlight the key factors that will boost both companies to recover the revenue and margin stream eventually?

Federal funding is not going to shrink. It's the state funding that will shrink. The states are in financial trouble. Unlike the feds, they don't have a money press. The states have to fund primary and secondary education. They don't have to fund post-secondary education. This will force them to cut back in a huge way on the budgets for post-secondary education. It's happening now. Budgets for the state-funded colleges are being cut at double-digit rates. Every year. Many state-funded colleges are no longer admitting new students as we speak.

90% of post-secondary education is funded by the states. (straight funding not loans!). That is going to shrink to 10% before all is said and done. The 10% of post-secondary education that is currently being funded by the feds is going to balloon to 90%. Broadly speaking, federal funding is a loan system. Taxpayers are probably better off even if just 10% of students repay the loans.

All that the ED has accomplished is that it is now very tough to get into this business. The for-profits that are eligible and are able to remain so, will grow 10 fold. You'll note COCO has been enrolling a lot of full-time (healthcare) students in recent quarters. Where did those students come from? COCO used to enroll only students who were unable or unwilling to attend full-time courses at state-funded schools. That has changed.

As I see it, COCO has room to grow at least 5-fold in the next 5-10 years. It currently trades at 2x run-rate earnings. That is why I say "both".

blainehodder
Blainehodder - 1 year ago
Link to the CS conference:

http://seekingalpha.com/article/1263981-corinthian-colleges-inc-presents-at-credit-suisse-15th-annual-global-services-conference-mar-11-2013-12-00-pm?page=1

Check out this passage:



You can see that in the first 6 months of the year, we generated about $102 million of operating cash flow. We used that largely to pay down debt, which if you go to the next to the bottom line, you can see debt went from $149 million down to $47 million. That's using our operating cash flow to pay debt back.

Market cap is 184M!!!!!!

On the financial responsibility and Title IV eligibility :



And so as a result, we're going through the process. We have done a number of things. We gave them 3 options to consider. The first option was we revised our 2011 numbers, which put us in the zone above 1 because we had a number of schools that we put into discontinued operations in 2012. And when you do that, you revise your 2011 filings with the Securities and Exchange Commission. And as result, that improved our performance in 2011.

The other thing we did based on a request from the department is we accelerated our filing for 2012. We've submitted that back in December. We think we're in a very good place. We think we're above 1.5 for 2012, and we think we're going to be above 1.5 for 2013. And so those were 2 of the options.
[/color] [color=#0000bf]And then the third option, obviously, was to get the accounting right. So that's where we are. We're in reconsideration on that. I'm in routine conversation with the department, the most recent was about 3 weeks ago, and they're just going through a process. So that's what's happening on ED.If I could find more securities like this I would be happy.

batbeer2
Batbeer2 premium member - 1 year ago
We used that largely to pay down debt, which if you go to the next to the bottom line, you can see debt went from $149 million down to $47 million. That's using our operating cash flow to pay debt back.

Yeah. To me that's a pretty clear indication that the company is capable of generating $100m of owner earnings. In fact, it is doing just that.

We're in reconsideration on that. I'm in routine conversation with the department, the most recent was about 3 weeks ago, and they're just going through a process. So that's what's happening on ED.

This reminds me of the situation with WCG in 2008/09. At the time, WCG was trading at 1x owner earnings and there was an investigation that was dragging on and on. To those willing to look, it was clear WCG had mended its ways but there was still uncertainty regarding the ongoing investigation.

At one point, it dawned on me that a regulator is unlikely to shut down a business for something they have known for years. The regulator would have to explain that the situation was totally unacceptable. They would also have to explain why they had allowed the business to operate for another two years before shutting it down. That is a very tough combination to sell.

Arne Duncan knows he will be unable to answer a lot of tough questions if he takes COCO to the woodshed now. The ED would be in crisis in trying to explain corrective action two years after the fact.

In short, I believe the ED is looking for ways to settle this peacefully. It will take a while though.

An old discussion with WCG trading at $7-$13: http://www.gurufocus.com/forum/read.php?1,43279,page=2
longleaf
Longleaf - 1 year ago
Hi Batbeer2, Thank you for inputs. 1) I will lower my expectation since it's related too much politics and assumptions here. 2) I will wait the next market correction to tell if it hit rocky bottom already. 3) I will treat it as a tiny antique collection to put in a drawer for a couple of years to see. Thanks again.
batbeer2
Batbeer2 premium member - 1 year ago
COCO has released the three year cohort default rates as determined by the department of education.

The weighted average of the Company’s institutions was 19.0%, a 9.2 percentage point decrease from the 28.2% weighted average for the three-year measurement of the 2009 Cohort. For the 2010 Cohort, none of our institutions exceeded the 30% default threshold.

IMHO COCO is doing a good job. Some would argue they are doing it by less than etical means. Either way, the company is currently in compliance. It's also earning lots of money.

When the stock first headed south (2010), the bear case could be summed up as:

If the the ED doesn't shut down these schools for being out of compliance, they will at least crack down hard enough to permanently impair margins.

It is now 2013 and it is just not happening.

Even if the ED should come out with a new and tougher set of rules, logic dictates that the outcome will be the same. COCO will simply adjust. Since students can't enroll elsewhere, tougher rules will only serve to raise prices.

This is not a bubble. The number of students in the US is not growing. Neither is the total cost of education. It's just that more students are enrolling at for-profit schools and students are now paying for a greater percentage of the cost of their education.

Students are not taking those loans because they want to or because the loans are so cheap. They would rather not take a loan at all. They just don't have other options. The state funded colleges are basically bankrupt.

People buy Apple because they want to..... untill they don't.

People enroll at COCO because there's no alternative. That's a moat.

Just some thoughts.
blainehodder
Blainehodder - 1 year ago
Everything appears to be chugging along nicely. It is great to see the default rates under control. It can only serve to boost the ED's confidence in COCO and the title IV loan portfolio. Interesting that the stock has cratered in the past few days with what I can only describe as good news.

It seems it will only be a few more quarters before the cash will start to pile up here since the majority of interest bearing debt has been cleaned up. Now lets just hope for an announcement of a resolution on COCO's Title IV eligibility. I don't mind the massive short interest either, as it could act as decent fuel.

batbeer2
Batbeer2 premium member - 1 year ago
Worst case scenario, COCO needs to post a letter of credit to the tune of $1B. I don't think it's likely but I can't rule it out completely either.

A $1B letter of credit would be a problem (IMO non-fatal) but if the ED waits some longer, COCO's balance sheet will be so strong that they could do it without much trouble. COCO could subsequently argue they have been in compliance since and then the letter of credit would be put back to them.

As I understand it, the letter of credit is not a fine!
blainehodder
Blainehodder - 1 year ago
No, it is definitely not a fine. It is a standard LOC. The worst case scenario really appears to be 175 Million LOC to be posted. While I honestly believe the ED will repeal this ruling, if COCO is forced to come up with 175 million to be posted, it could be somewhat problematic. They simply do not have that much cash on hand (yet).... This leaves seeking capital in the market (and therefore dillution possible). Bankruptcy is a small possibility.

At current prices paid, I'll take on that risk. Remember all, the ED has real risk here too. If COCO can't come up with the money, that has real consequences on all of the students as they would no longer be eligible for federal loans. That is an enormous political risk which can be avoided with the stroke of a pen. I'm willing to play chicken with the ED. The ED is not incented to force the LOC issue, particularly given the loan portfolio to COCO students is improving, and COCO is not currently violating any metrics.

Here is the relavant info from the quarterly



The Company continues to believe its calculations regarding the 2011 composite score are correct, however in November 2012 the Company received a letter (the “ED Letter”) from the San Francisco/Seattle Participation Division of ED in which ED took a contrary position with regard to the treatment of the goodwill impairment charge and the security deposits described in items (1) and (3) above. Based on its treatment of these items, ED calculated the Company’s composite score for the fiscal year ended June 30, 2011 to be 0.9. The ED Letter further outlined the means whereby the Company can continue to meet ED’s alternative standards of financial responsibility by either (1) agreeing to become provisionally certified, accepting cash monitoring level 1, and posting an irrevocable letter of credit equal to 10% of the Title IV Program funds received by Corinthian during the fiscal year ended June 30, 2011 (calculated by ED to be $175.7 million), or (ii) remaining unconditionally certified and posting an irrevocable letter of credit equal to 50% of the Title IV Program funds received by Corinthian during the fiscal year ended June 30, 2011 (calculated by ED to be $878.5 million). The Company believes these amounts may have failed to account for refunds made during fiscal 2011, and therefore may overstate the Company’s total Title IV revenue during the year. Provisional certification status would not limit the Company’s access to Title IV Program funds, but would subject the Company’s institutions to closer review by ED and could limit the addition of new programs and locations.

batbeer2
Batbeer2 premium member - 1 year ago
>> if COCO is forced to come up with 175 million to be posted, it could be somewhat problematic. They simply do not have that much cash on hand (yet)....

IMO that wouldn't be a problem at all. COCO used to service more than $300m worth of debt without any problems. They're now down to $50m or so. Methinks they could easily borrow that kind of money in days. It's the $800m letter that worries me. Then again, that would be their own choice.

blainehodder
Blainehodder - 1 year ago
I suppose you are correct Batbeer2. I don't foresee that much trouble getting the needed financing, given the cleaned up balance sheet of the prior Q.

Ironically, this would hurt the current equity ratio in the financial responsibility metric though, but it won't push them into danger territory. I guess equity dilution isn't very likely unless they need to come up with the larger 878M sum.

I am really tempted to add to my position tomorrow morning if at these levels.

longleaf
Longleaf - 1 year ago
I saw Wells Fargo filed 13G/A on April 11, added some shares for COCO.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Management seems to be politically savy. First they commission a "research" study that shows an increasing need for higher education. Then they add two people to the board who should help them deal with the ED.

The more I learn, the more I can't understand why this stock is so cheap - even considering "the bad" and "the ugly" above.

A concern I always have in these situations is what I don't know (that the market does know).

I was wondering if there is a "gotcha" in the default numbers?

Namely, COCO student's default rate looks fine now. But, if COCO aggressively encouraged defaulting students to apply for a temporary loan extension, could that make the default numbers temporarily look better than they really are. Namely, after the one year extension expires, the student default rate could skyrocket and COCO could be in big trouble.

This is just a hypothesis. I don't know if this is even a possibility because I don't know how these student loans work.

Is this a concern you've looked at?

If so, I was wondering if you could share what you've learned?

Thanks!
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

One more thing... I was a bit put off that on their recent conference call they didn't offer cash flow guidance for the full year. I thought it was a bit odd. Do you make anything of that?
swnyc2
Swnyc2 - 1 year ago
Never mind that last comment, JM cleared it up.
batbeer2
Batbeer2 premium member - 1 year ago
>> I saw Wells Fargo filed 13G/A on April 11, added some shares for COCO.

Yes. Then again, the Washington Post company sold some shares. They once owned 8%. Now its 6%.

>> But, if COCO aggressively encouraged defaulting students to apply for a temporary loan extension, could that make the default numbers temporarily look better than they really are. Namely, after the one year extension expires, the student default rate could skyrocket and COCO could be in big trouble.[/i

COCO isn't forever responsible for the behavior of their (former) students. Whether or not they have aggressively pushed out those loans.... I know I would. Being aggressive on the loans on day one while also enrolling less risky students to prevent future problems seems logical. Whether or not the former is the case is IMO irrelevant to the thesis. The important bit is that you can see the latter happening in the trailing 9 months. Student population is down while revenue is flat/up. They have more full-time students now. To me this means there's less risk in the current population.

By the way, define "in big trouble". Worst case, a given institution (that's not all of COCO) is disallowed from enrolling students that are paying for tuition with title IV loans.... until that institution gets its act together. Even if you assume management is less than ethical, this would only happen if they were dumb as well. The logical thing to do is to stop enrolling those students before the s#!t hits the fan. You'll note COCO has been "teaching out" a number of schools.

FWIW, I believe current management is both ethical and smart. The former CEO may have been less than brilliant. Peter Waller overloaded the balance sheet and triggered the issue`with fiscal 2011 "financial responsibility composite score" that could potentially force COCO to post a letter of credit to the DoE. Meanwhile he was spending cash to buy back shares. That's a dumb combination.


My best guesses as to why this is cheap:

- Many avoid the for-profit industry. It's perceived to be risky.

- Those that do invest in the space avoid COCO. It is perceived to be the worst within the industry.

- Because Master's degrees are worth more than diplomas, investors feel schools at the lower end of the spectrum should be economically worth less too... FWIW, I believe the reverse is true.

- If you invest in HPQ and the stock tanks, people will ask you "what is wrong with HPQ?" If you invest in COCO and the stock tanks people will ask "what is wrong with you?"
batbeer2
Batbeer2 premium member - 1 year ago
I should probably read the transcript of the conference call. It seems I'm the only one on this thread who hasn't done that yet :o)
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Thank you so much for your thoughts.

I guess I just don't understand the risk.

>>

- Many avoid the for-profit industry. It's perceived to be risky.The for profit industry is filling a perceived consumer need that the not-for-profits can't or wont.

The desire for the service is relatively consistent.The company is profitable

-Those that do invest in the space avoid COCO. It is perceived to be the worst within the industry.

Why is it the worst? It has default rates that are well below federal requirements. According to yahoo finance data, as of the end of 2012 there is no net debt (cash on hand = total debt). Companies without debt don't go bankrupt.

As for the letter of credit issue, I think that it's unlikely to happen for many of the reasons described above. Furthermore, even if it did happen, the letter of credit is not a fine. They should be able to borrow the money (or worse case sell equity) for the LOC. But the money they raise for the LOC is an asset that eventually would be returned to the company - assuming the default rate doesn't go up, but they're in control of that.

If COCO has owner earnings of only $0.45 per share ($500 per student x 90,000 students) and they don't grow at all, they could pay a 10+% dividend indefinitely (with only a 50% payout ratio). That's a HUGE margin of safety!! What are the shorts thinking???

By the way, Batbeer2, I was wondering why you removed SPLS from your portfolio? You've been so patient with COCO over the years, Why not SPLS?
batbeer2
Batbeer2 premium member - 1 year ago
>> I was wondering why you removed SPLS from your portfolio? You've been so patient with COCO over the years, Why not SPLS?

I still like SPLS, I just like QUAD more. The thesis is similar. Both operate in an industry that is facing both cyclical and structural pressure and both are in much better shape than their direct comps.

BUT.... QUAD has roughly 10% market share and SPLS is at 30% already.
batbeer2
Batbeer2 premium member - 1 year ago
>> What are the shorts thinking?

I think Chanos says it best. It was a while ago though. That interview has been dug up more recently.

IMHO, If only 50% of the loans are ever repaid, that's still much more effective than the traditional system. Traditionally, states funded 80% of the cost of education directly. While some like to think that is how it should be, I believe the states simply won't be able to pay for it any longer. Importantly, they don't have to. This is a HUGE part of their budget and its discretionary. There is no law compelling states to pay for the tuition of adults.



Also, I've seen some arguments that title IV is fueling a bubble. IMO the education "market" isn't growing or "hot". There aren't many more students today than there were a decade ago. It's just that the for-profits have taken market share. As for the huge increase in tuition rates, that's not a result of higher wages or bonuses for anyone involved. I believe It's the result of reduced public spending by the states.
batbeer2
Batbeer2 premium member - 1 year ago
The SEC has launched an investigation. Shares are down.

IMHO this bit of news doesn't affect the thesis.
swnyc2
Swnyc2 - 1 year ago
I hope you're right.

The SEC can seek monetary penalties and return of illegal profits.

It's hard to know what this will amount to, but it will likely be less than the $20+ million market cap loss today.

blainehodder
Blainehodder - 1 year ago


Batbeer,

What is your take on Panetta resigning? Foreshadowing a loss on the 2011 metrics/ LOC raise? more trouble down the pipe? Or just a busy guy for a 75 year old blue hair as stated?

http://online.wsj.com/article/BT-CO-20130722-710782.html?mod=s_wsj

batbeer2
Batbeer2 premium member - 1 year ago
Hi Blainehodder.

I do not like the news of Panetta resigning.

At best it is poor judgement on his part to take the job and then resign so quickly. If COCO gets a guy like that on the board, that means its poor judgement on their part.

At worst, Panetta is the famous rat leaving the ship.

It seems there is no end to the stream of bad news for COCO. This is getting tedious.

Having said that, I'm still hanging in there. I stand by the thesis:

1) There is no other for-profit I know of that you can buy for $2000 per student. Meanwhile, fees at state-funded colleges are still rising at double-digit rates even as capacity is being reduced. Especially in California. In the end that is what drives the economics of COCO. I'm amazed that these schools are turning away students while still sponsoring their basketball teams.

2) The regulators have been all over COCO for years. There is not much they are going to find now. There may be some fines and/or restatements but I think the current numbers are as clean as any you'll ever see by any company.

3) The ED is still the single most important risk and the fact that they have not made their move yet reinforces my belief that they are not going to shut down COCO.

This reminds me of Biovail, another troubled Ruane Cunniff stock. From '04 to '10, nothing but bad news. I owned it for a while. I sold too soon. Biovail is now known as Valeant pharmaceuticals.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

I can't imagine Panetta being "too busy."

The 2 most likely reasons he left are:

1. He learned unsavory things about COCO that made him want distance himself from it to protect his reputation.

2. He learned things that made him believe that COCO would fail financially, and so he would not profit from being on the board (rat leaving the sinking ship).

I favor possibility #1, although I cannot eliminate possibility #2.

As a result I am hanging on to my COCO shares, but I will not add more.

Instead, I opened a position in APOL. It may not be the home run that COCO is, but it is still a substantially undervalued stock that fits the same thesis.

The reward may be lower than with COCO, but the risk is also lower as well....

batbeer2
Batbeer2 premium member - 1 year ago
Yeah...

I believe he was brought on for his political influence. Maybe he has developed some political interests/ambitions that do not mix well with his role at COCO. Not a matter of time but a matter of conflict of interest.

That would be the third possibility.

I'm not ruling out yours but I think this is most likely. If that's what's going on, what he has stated would not be untrue..... which is precisely the kind of lie one would expect from a politician.
batbeer2
Batbeer2 premium member - 1 year ago
BINGO

>> On August 16, 2013, Corinthian Colleges, Inc. (the “Company,” “Corinthian,” “we,” “us” or other similar terms) received a letter from the U.S. Department of Education (“ED”) regarding its review of the Company’s composite score for the fiscal years ended June 30, 2011 and June 30, 2012 (the “ED Letter”).

The ED letter states that ED has determined the Company’s composite scores for fiscal 2011 and fiscal 2012 to be 0.9 and 1.5, respectively, and that the Company will not be required to post a letter of credit.


IMO the worst single risk for the company is now removed.

batbeer2
Batbeer2 premium member - 1 year ago
A couple of articles about COCO worth reading at SA.

I think it's neither a five-bagger nor a value trap.
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2,

Thanks for the articles.

I am confuse though about your last comment about COCO not being a 5-bagger.

Have you had a change of heart?

batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc2,

No.

The article I linked to is headed "five-bagger or value trap". I think COCO is neither.

I don't think it's anything in between either. IF I'm right it's a 10 bagger.

@ $15 COCO would be trading just under 1x sales. That's in-line with some other for-profits.

The rest will have to come from growth.

It's now very clear the competition (state-funded colleges) in California are in dire straits.

10-k will be out this week.

kind regards,

F
vgm
Vgm - 1 year ago
Hi Batbeer,

Thanks for the great writeup.

In the second of those articles you mentioned, the author has gone for COCO - hook line and sinker - after confessing to not being sure in the first article. Seems extreme:

"After considering what is publicly known now and the likelihood and consequences of various potential events in the future, I decided to liquidate my existing positions and put my entire portfolio into Corinthian stock."

http://seekingalpha.com/article/1633072-corinthian-five-bagger-or-value-trap-part-ii?source=yahoo
batbeer2
Batbeer2 premium member - 1 year ago
>> In the second of those articles you mentioned, the author has gone for COCO - hook line and sinker - after confessing to not being sure in the first article. Seems extreme:

I see what you mean. Then again, I believe the author is relatively young. If your portfolio is worth say.... 3x your monthly income, your behaviour may be different than if your portfolio is worth 5x your annual income.

Just speculating here....
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2,

Any thoughts on the latest 10-k?

Regards,
batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc2,

LOL..... 10-k, what 10-k?

At this point in time the SEC hasn't got it on its site ;o)

I'll let you know what I think when I've read it.
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2,

Sorry. I meant today's 8-K.

Regards,
swnyc2
Swnyc2 - 1 year ago
Here's a recent article that might be of interest for those interested in investing in this sector.
vgm
Vgm - 1 year ago
Thanks swnyc. Interesting article.
swnyc2
Swnyc2 - 1 year ago


Not a good week for COCO share holders.

The stock tanked after the most recent earnings report: down 6% on Friday, down 18% for the week.

Salient points from the call include:

  • Net revenue was $377.5 million versus $387.9 million, a decrease of 2.7% (4QFY13 vs. 4QFY12).
  • Total student population at June 30, 2013 was 81,284 versus 90,794 at June 30, 2012, a decrease of 10.5%. The decrease in student population was due to decreased on-line enrollment.
  • The company projected FY14 annual diluted earnings per share of only $0.10 - $0.15 per share.


In their most recent 8-K, they also mentioned that:

Cash flow from operations was $41.5 million in the year ended June 30, 2013, versus $152.8 million for the year ended June 30, 2012. The decrease is primarily due to the timing of cash receipts and payments.

Debt and capital leases (including current portion) totaled $139.1 million at June 30, 2013, compared with $149.0 million at June 30, 2012.

Capital expenditures were $44.1 million for the year ended June 30, 2013, versus $42.2 million for the year ended June 30, 2012. (They projected Capex to be about $40 million for 2014.)

While compliance with old regulatory rules appears not to be a material issue, new proposed rules may present problems in the future.

batbeer2
Batbeer2 premium member - 1 year ago
The 10-k is out and management has had their earnings call.

My observations (*) and comments (-):

* FY revenue is up.

* Total student population is down but ground-school population is growing.

- This reflects the ongoing transition to a higher quality full-time student population, formerly served by community colleges.

* Problems with the ED about "financial responsibility standards" are put to rest.

* Company has done a fan-tas-tic job of reducing default rates of its (former) students.

- The improvement is not "cosmetic" as previously thought but seems fundamental.

* FY earnings of roughly $0.20 per share are wiped out by yet another one-time charge of $25m.

* 40k students graduated from COCO this year.

* SG&A has been declining. From $205m in 2011 to $165m this year.

- Management expects to reduce costs by $40m next year. This would bring SG&A in line with 2009. Increased efficiencies will come from automation of regulatory reporting process and consolidating of schools into fewer OPEIDs. With their Heald schools, they now have one regulatory entity where they first had 9. This was approved by the ED in the quarter.

* Management expects some growth this year.

OK.... though this is taking longer than I thought, the thesis has not been disproved. On the contrary.

I'm hanging on. See if management can deliver on their promises. IMHO they have managed the worst problems/risks very well.

In November, the talk was about student default rates and a possible letter of credit to the ED. Now it's the possibility of another round of even more onerous regulations. While I don't know what future regulations will look like, I think it's clear COCO, unlike the competition, has shown it is able to adapt.... Darwin.

Just some thoughts.
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2,

You're right that the company has done a good job reducing its default rates (as they are currently defined).

However, by their own admission, they have not done a good job with their on-line enrollment



Including the $40M in cost reductions
, management is predicting earnings of only $0.10 - $0.15 per share for FY 14.

WIth a P/E of ~15, I can see how that gets us to ~$2 per share, which reflects the market price of the stock today.

On 8/18/2010, you gave COCO a fair market value of $13 per share.

In November 2012, you felt that earnings of $0.55 per share was pessimistic.

Do you still believe in such a large upside?

I have to give you a lot of credit for patience. You've been holding this stock much longer than I.

What do you think it's going to take before we see good, old fashioned earnings increase?

batbeer2
Batbeer2 premium member - 1 year ago
>> Do you still believe in such a large upside?

Yes.

>> I have to give you a lot of credit for patience. You've been holding this stock much longer than I.

Not sure if that's something to be proud of ;o)

Like with QUAD and AHC I can see the profit slowly making its way to the bottom line already, even though the earnings have been negative for years. Revenue is flat/up yoy. SG&A is down. In addition, the fundamentals (student mix, default rates etc.) are much better today than they were a year ago.

A lot of people wouldn't believe it could be done. It is now done. The issues to me seem much smaller this year. Now they've saying they are going to take out $40m of costs. I think that's a realistic goal. Add that back to this years pre-tax earnings assuming 0 growth for the year...... If they don't generate at least $30m of after-tax earnings this year, it will be a surprise to me. If so I may have to conclude I'm out of my depth/wrong.

One more year. That would make it two years since I wrote this article. I don't think two years is too long to see a thesis work out (or not).
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2,

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

batbeer2
Batbeer2 premium member - 1 year ago
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.

swnyc2
Swnyc2 - 1 year ago
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...
batbeer2
Batbeer2 premium member - 1 year ago
>> 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.
equitynovice
Equitynovice - 1 year ago
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.

http://www.amazon.com/Change-edu-Rebooting-New-Talent-Economy/dp/1609788990
swnyc2
Swnyc2 - 1 year ago
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!
batbeer2
Batbeer2 premium member - 1 year ago
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.
swnyc2
Swnyc2 - 1 year ago
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.

batbeer2
Batbeer2 premium member - 1 year ago
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.
goorew
Goorew - 1 year ago
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.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Goorew,

Good question.

>> What do you think Batbeer2?

I think it depends on employment rates.

COCO has been around for a while. Historically, (un)employment has been a very important driver of default rates on the loans. Off the top of my head, 85% of today's graduates are immediately employed in the field they were trained for. COCO works hard with employers to help with the transition.

In any case, that metric has improved a lot since the return of Jack Massimino.

Based on the current numbers for post-graduation student employment, I think 50% repayment rate should be achievable.

For every 10% under 50%, my estimate of owner earnings would come down by roughly $10m. For now I'm sticking with $50m of owner earnings so even 75% default would leave you with $25m of owner earnings.

To me, the real problem is that these numbers take years to work their way down to the bottom line. Management can hide losses or for that matter earnings.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

FYI, I saw a TV commercial from a not-for-profit college advertising its online educational services.

Here's a link to their website.

While there isn't much overlap with COCO's course offerings, there is some (e.g. nursing).

This got me thinking about the growing popularity of on-line courses in general.

On-line courses must be less expensive to administer than traditional campus courses.

As such, it is not unreasonable to assume that the need for campuses will decrease in the future.

This shift could force COCO to close some campuses in the future (which could cause additional short-term costs). Also, the rise of on-line courses will likely increase competition between COCO and other institutions, whether they be for-profit or not-for-profit. Increasing competition inevitably leads to decreasing margins.

Given that you believe annual owner earnings are $50M and COCO's enterprise value is $300M, I can see why you think COCO is cheap, although not incredibly so.

However, in light of the probable future increase in popularity of on-line courses, I'm now having a harder time seeing your case for long term growth for COCO.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc2,

Adding bonds to stocks is like adding apples to oranges. You will get some number but information is lost in the process. Maybe someday I'll write an article about the uselessness of EV..... if I'm unable to dig up some cheap stock to write about instead.

For a company that can clearly service its debt (like COCO), use market cap. If it can't, then you could look at the bonds instead; try to figure out the fulcrum debt.

As for online courses, that is one reason I prefer COCO to some of the other for-profits. Nurses, dental assistants, mechanics... they need to acquire practical skills. Some courses can and will be offered online, but not all. You will need some old-school :o) basic infrastructure to teach those practical skills.

Also, COCO has important relationships with local employers. This helps get graduates those all-important jobs. At 85% placement rate, graduating from COCO gets you a piece of paper and a job. That is not something you can do with (Internet) software.

The southern New Hampshire university you link to is mainly focussed on business administration which is obviously more easily taught online. I think they are in competition with DeVry and Apollo and not so much COCO.

In any case, this market is still dominated by state-funded colleges. They are turning away increasing numbers of (high-quality) students. That is what will drive the growth of federally funded schools.

Yes, the (not-)for-profits will compete among themselves but as a group, they will inevitably gain share as post-secondary education in the US shifts from a state-funded system to the federally funded system. For the individual states, post-secondary education is a discretionary expense.

I think it's a shame but I also think it is inevitable.

Just some thoughts.
goorew
Goorew - 1 year ago
Hey Batbeer2, those are good points (although I'm wondering about the accuracy of those placement rates based on what I've read from ex-students on the web). But either way, we weren't on the same page there; let me clarify:

I'm confused about COCO's "discount" loan program and what the exact effect is on its balance sheet, income statement, and cash flow, particularly as it a) grows in absolute value and b) might have higher defaults than expected.

Have you studied the program in detail? Do you mind explaining the mechanics of it?

Then, regarding the risk here: Is the company hiding liabilities? Is it overstating current assets? Will earnings fall as the company buys back an increasing number of these loans (# of loans increased each successive year for past few years)? Most importantly, will the company's cash generation ability drastically fall due to this program? Etc...

This just seems like a big issue to me.
batbeer2
Batbeer2 premium member - 1 year ago
>> although I'm wondering about the accuracy of those placement rates based on what I've read from ex-students on the web

Yeah it's more like 70%; not 85%. Still not bad. Yale isn't much better.

>> Have you studied the program in detail?

I haven't. I'll look into it and talk a bit about it after I have.

The reason I haven't dug into the gory details is that I get the impression they're recording those loans at a very big (off the top of my head 50%) discount to nominal value; that's a big drag on current earnings. In any case, my initial assessment indicated it wasn't artificially inflating current earnings at the expense of future earnings.

I wrote about CONNs a couple of years ago. Their problems were similar. Conns had historically been able to offload the loans but were forced to bring it all onto the balance sheet in the credit crunch. Sound familiar?

As long as they were able to offload the loans, FCF got recognised immediately. Recording them on the balance sheet meant the FCF took a bit longer trickle down. For two years the spring got compressed. In the end it was a positive. Because investors were unsure of the economic value of the loans, they assumed they were worth less than nothing. I learnt a thing or two with that one.

CONNs too is a place people do not go to because they want to but because they have no alternative.

But again, I'll look into the gory details and get back when i've a better grasp of the magnitude of that program and sensitivity of FCF to any default rate assumptions in there.
goorew
Goorew - 1 year ago
I'll read up on CONNs in the meantime!
batbeer2
Batbeer2 premium member - 1 year ago
The 10q is out.

The good:

With $40m of cash from operations for the quarter, and $12m of capex (guidance for the year is $40m) COCO is on track to generate at least $50m of FCF for the year. That's a lot of cash for a company with a market cap of $175m.

Like last year, they've spent some $35m reducing their capital lease obligations and long-term debt.

The bad:

Net revenues decreased about 11% to $365m compared to last year. Student population is 80 000 compared with 90 000 last year. The decline in was largely due to a reduction in ATB students and a decline in the exclusively online population. Total student starts decreased to 28 500 from 31 500 last year.

Roughly speaking, we are now back to 2008 levels. In September 2008, student population was 74 265, with total starts at 30 000. Revenue was $290m back then. It's now $365m.

Quarterly revenue per student has gone up from $3 900 to $4 500.

The ugly:

COCO's board awarded their CEO a bonus. Here are the numbers they used explain their decision:



Got it?

Here's a hint: The board didn't focus on relative performance. They focussed on a relative trend.

Got it?

I hope not. I've been thinking about this for a week and I still don't get it. Here's what the directors said:

..... the median operating income growth for companies in our sector during the comparable time period was -35% ..... our actual performance of -9% was among the best in the industry over this time period.

I'm not making this up, they filed this with the SEC. COCO's operating earnings didn't fall as much as CECO's... so Jack Massimino deserves a bonus.

Given that Jack's colleagues at DeVry and ITT earn about twice as much as Jack, I do not begrudge him this money. My problem is with the board. I'd prefer they just give him a raise if they think he deserves it but do not insult your shareholers with this BS.
batbeer2
Batbeer2 premium member - 1 year ago
>> Then, regarding the risk here: Is the company hiding liabilities? Is it overstating current assets? Will earnings fall as the company buys back an increasing number of these loans (# of loans increased each successive year for past few years)? Most importantly, will the company's cash generation ability drastically fall due to this program?

OK, I've looked into it.

Short answer:

I think it's not a big (or even small) risk but it's an important metric to keep an eye on. If there are problems they'll show up there first.

Long answer:

The company will lend a student some money and sell that loan to ASFG LLC at a 50% discount. ASFG has the right to put the loan back to COCO at that price (50% discount) if no payment has been made for over 90 days. Of course, any principal payments collected by ASFG before that point are deducted.

One reason for COCO to do this is to meet the 90/10 rule. If COCO generates more than 10% of it's revenue through these (non government) loans, that's good for COCO.

Why would ASFG do this?

Because its profitable. Let's say 20% of COCO's students default on their loans.... would you be interested in buying loans to these students at 50% of face value?

You probably would. In fact, even if a student failed to pay for longer than 90 days, you'd probably not put that loan back to COCO unless you were absolutely sure that particular student was never going to repay the loan.

So what is the magnitude of this scheme?

This quarter, students took on loans to the tune of $50m (that's 13% of COCO's revenue). Last year, for the full year, it was $193m. 50% of this gets written on COCO's balance sheet as a liability that could be put back by ASFG.

Today, COCO's total liabilty from this scheme is roughly $75m. This means:

1) If all the loans were put back to COCO by ASFG, COCO would have to pay $75m. I's already a lability on the balance sheet so it wouldn't have an effect on earnings. In other words, the effect has already been seen. It would have a (one time) effect on FCF though.

2) The loans are repaid witin a couple of years. This is not a portfolio of risky long-term loans that may or may not work out over many years. COCO sold $193m worth of these loans last year and the face value of all the outstanding loans today is about $150m (they're on the balance sheet at 50% off) implying the loans they sold the year before have been repaid.

The thing to monitor is probably the ratio of loans outstanding versus the amount sold under that program in the previous year. That ratio is now below 1. If it goes up, then it's a red flag.

Of course, if COCO starts selling fewer loans to ASFG (less than 10% of revenue) that would be very good. This would mean someone else is funding those students. The reverse would be bad. I would not want to see the loans sold to ASFG rise above 15% of revenue. Any reason for COCO to do that is bad.

Also, one would expect ASFG te accept a lower discount in future. Default rates at COCO have been going down for years now. If they negotiate a higher discount, that would be very bad.

Just some thoughts.
varunfriend
Varunfriend premium member - 1 year ago
Wow - this is getting fugly ... just added to my position, like QUAD - original thesis seems valid and no additional news has come out. The short interest on this stock is high - when the squeeze comes we'll see a good pop (at least thats my hope ..)
batbeer2
Batbeer2 premium member - 1 year ago
Yeah.... The latest drop is maybe caused by the fact that COCO has been removed from an index. Also, many US investors have probably done well this year; there may be a bit of selling of COCO to offset the taxes. Or....... I'm just wrong. While this is taking much longer than I expected, I stick with the thesis.
softdude2000
Softdude2000 - 1 year ago
Batbeer, Thanks for patiently answering all our questions for free:)

(1)

Most for-profits now have around 20% or more online students. What scares me, there is no capacity problem for online education and not-for-profits are getting into online business. Can public colleges poach all or many online students with lower fees after benefiting from government funding and brand name.

(2)Now ethical issues are mostly behind, are we getting into new problems like price wars among for-profits, even for campus education. Like STRA cutting 40% tuition fee for students completing full course. I like the fact for-profits are becoming affordable and efficient, but it could also be new paradigm shift for investors.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Softdude

I think COCO is protected a bit from the online "race to the bottom". Nurses and mechanics require some practical skills that you just can't learn online (as opposed to say accounting).

Having said that, COCO does have a significant online presence to generate some non-title IV revenue. This helps to comply with the 90/10 rule.

So yes, I think it's a risk but it's a bit less of a risk to COCO than it is to some of the other players.
swnyc2
Swnyc2 - 1 year ago
Dear Batbeer2, It's been a year since you wrote the article. The price per share is now $1.74, down roughly 20%. From your comments above, I believe you still think the stock is absurdly cheap. I agree. However, I was wondering....: In your opinion, is the stock a better buy today than it was a year ago? Or, have developments over the past year decreased it's upside in excess of 20%, so that while still a good buy, it may be less so (as compared to what you originally thought a year ago). Or, maybe you think it's about the same? Just curious as to your thoughts.... Regards,
batbeer2
Batbeer2 premium member - 1 year ago
Hmmm.... interesting question.

Yeah, my estimate of intrinsic value is lower now than it was when I wrote the article.

Though I still believe the company is doing better than the community colleges it competes with, the entire industry is facing cyclical headwinds. COCO is counter cyclical. The economy tanks and more students enrol. The reverse is true too.

On the positive side, the risks that were there last year have been largely removed. Given that I wasn't expecting any of those risks to be fatal (I wouldn't have written this if I did) these risks didn't detract from my estimate of intrinsic value to begin with.

So.... all in all, I'd say my estimate of intrinsic value has dropped along with the stock. My estimate of IV is still multiples of the stock price though.
varunfriend
Varunfriend premium member - 11 months ago

Huffington Post is claiming that COCO created fake jobs to get taxpayer money

http://www.huffingtonpost.com/2013/12/16/corinthian-colleges-job-placement_n_4433800.html

It looks like they paid $2000 to an employer to hire students for at least 30 days

https://www.documentcloud.org/documents/894492-everest-decatur-1.html

If this is true ... I am concerned regarding the ethics of the management.

Thoughts Batbeer2?

batbeer2
Batbeer2 premium member - 11 months ago

>> If this is true ... I am concerned regarding the ethics of the management.

I agree.

What's more, the CEO got a bonus this year. I don't have a problem with that per se. I do have a very big problem with how the board has motivated that bonus.

Here's the data they used (from the DEF14A)

The board took the operting earnings of APOL, ESI and Strayer (all had double-digit operting margins) and compared that with COCO (3%) operating margin. Last year, APOL ESI and some others saw their opering income decline by 40% (mainly due to margin compression). COCO, starting from a measly 3% operating margin saw its operating income decline by just 9%.

So now the board says the CEO deserves a bonus for outperforming the peer group. What's worse, they decided to pick this particular metric after the fact. 

Again, I don't have a problem with Jack Massimino's bonus. As far as I can tell, he's worked very hard. I do have a big problem with the way the board is trying to validate the decision. As a shareholder, the full extent of my anger when I read that DEF14A just can't be expressed on this forum so I won't try.

But I'm still hanging in there..... by my fingernails.

varunfriend
Varunfriend premium member - 11 months ago

Yes i am starting to lose faith. I think it was Pabrai who said that 18 months is long enough time for the market to catch on if the original analysis is right. So I am giving it another 6 months and then I'll have to cut my losses.

varunfriend
Varunfriend premium member - 10 months ago

They just came out with their Q2 earnings ...

- New Enrollment down by 14% YoY

- Generated abt 50M in FCF for 1H.

- Reduced debt to 77M from 139M from prev Quarter

Its getting interesting with the lawsuits, they say 3 other schools are being investigated - not sure which ones.

batbeer2
Batbeer2 premium member - 10 months ago

Yeah.... it is getting very interesting. Much more interesting than I like to see but I still have a bit of patience left.

varunfriend
Varunfriend premium member - 10 months ago

At this rate by middle of this year they should be able to wipe out all debt. So if they cant go out of business at some point we'll see a huge bounce back. The short interest on COCO is absurdly high too.

maartenpieters
Maartenpieters - 9 months ago

Interesting filing by Shah Capital management:

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9864522-20301-24509&type=sect&TabIndex=2&companyid=705&ppu=%252fdefault.aspx%253fcik%253d1066134

Also they increased their equity stake significantly recently and now own 5.7% of the company.

I agree with all 5 points in the filing. Especially point 3 is important in my opinion:

3. Investor/Regulator Education: Corinthian should properly educate investors, analysts, and regulators on topics that have proven to be more difficult to grasp such as third party lending relationship (ASFG). In our view, these issues are creating unnecessary uncertainty and concern among regulators, investors, and within the analyst community, while further bolstering the thesis of short sellers. Additionally, we highly recommend quarterly issuance of detailed balance sheet and cash flow statements as this added layer of transparency would further reduce uncertainty.

batbeer2
Batbeer2 premium member - 9 months ago

@Maarten

Yes, that is very interesting, thanks!

While as a shareholder I would like to see the members of the board dismissed (not the CEO), I don't think point #4 is very convincing.

The other points are very good though.

varunfriend
Varunfriend premium member - 8 months ago

They are being sued by Mass.

http://www.wcvb.com/news/forprofit-school-sued-by-state-for-deceptive-practices/25316090#!CKMCp

Doesnt quite add up - they are finding people who havent found jobs for 5 years to quote.

I'd love for these guys to start buying back shares. The rate at which they are generating FCF, they should be very close to paying down all the debt by this quarter.

batbeer2
Batbeer2 premium member - 8 months ago

I wonder if they'll also be prosecuting all the state-funded schools with students who have been unemplyed for five years. At some point, reallity will catch up with this nonsense.

We shall see. For shareholders, including myself, it continues to be a major pain.

ingrx
Ingrx - 8 months ago

A general question, a company with big insider holdings would be more likely to bay back stock at the right price, would´nt it

Coco´s insiderholdings is not that big

batbeer2
Batbeer2 premium member - 8 months ago

>> A general question, a company with big insider holdings would be more likely to bay back stock at the right price, would´nt it.

Yes. Now that you mention it, I think companies with high insider ownership tend to do more buybacks. Graham Holdings Corporation (formerly Washington Post) and Loews come to mind.

COCO can't spend all its cash on buybacks because they have to maintain a very strong balance sheet to comply with the ED rules. Yet another problem COCO's state-funded peers don't have to worry about.

batbeer2
Batbeer2 premium member - 8 months ago

Finally, COCO strikes back.

This case provides the company with a platform to spell out in detail how the system is soooo biassed towards disfunctional state-funded colleges.

swnyc2
Swnyc2 - 8 months ago

Batbeer2,

Thanks for the article. It's a compelling case for COCO.

It makes me wonder whether Massachusetts is just piling on to to the existing lawsuits, so they can get some undeserved money from any settlement.

The cost of the protracted litigation and the Dept. of Ed's current freeze on new programs makes me wonder what will be left of the company. Your original article estimated earnings of $0.55/share based on 100,000 students. With schools closing, bad publicity from the law suits, and a freeze on new programs, enrollment is currently around ~80,000 and dropping. If it stabilizes at 50,000, would a rough estimate of earnings be 50% x $0.55/share = $0.25/share? If so, at a P/E of 10, the stock shoud be trading conservatively at $2.50 per share.

I am long COCO -- and may buy more....

batbeer2
Batbeer2 premium member - 8 months ago

>> If it stabilizes at 50,000, would a rough estimate of earnings be 50% x $0.55/share = $0.25/share?

I think that's a very reasonable estimate. They've been administratively consolidating some of their schools so SG&A should be a smaller part of revenue than it was when I made my initial estimates.

However, I think the student population is not going to stabilize at 50k. I don't dispute the 50k, I'm disputing the "stabilize" part. If it's 50k, then it would be a bottom. It couldn't be a new normal because:

1) Many States need to cut back on expenses.

2) Post-secondary education is a huge chunk of their budget

and

3) Post-secondary education is a discretionary expense. AFAIK, there is no law that says the state has to provide education to adults.

From this, I can see no other outcome than that the current state-funded system will gradually shrink to 0. It is happening. This of course means the market opportunity for the schools that are funded through Title IV is multiples of their current size.

The ED, with Arne Duncan, has been whipping the space into shape. IMHO he's not doing it on moral or ideological grounds but because he wants the system to be as good as it can be. Not just better than the traditional state-funded system. The ED isn't putting any pressure on the old schools simply because they'll be gone soon anyway. In future, it's the title IV system that will carry the weight of post-secondary education in the US.

Also, I think COCO offers the right curriculum.

If I'm right, Arne Duncan deserves a statue.

Then again, I've been arguing this for years and it hasn't done my portfolio much good.

>> I am long COCO -- and may buy more....

Same here

MFlyer
MFlyer - 7 months ago

Batbeer -

I would be interested in hearing your thoughts on COCO's program mix. I was listening to Devry's earnings, and they are definitely improving. Their managers said that their health programs are what is moving the organization positively right now, whereas their business and "technology" programs are lagging. Now that said, their health programs are more advanced than ours in general, but there is overlap. For instance, Jack talked on a call a couple ago about our growing nursing program. We have that in about 10 schools right now.

http://nursing.everest.edu/nursing-schools

and they are trying to grow it more, pending approval. Anyway, I’d be interested in hearing your thoughts. Health is the biggest area for Corinthian Colleges, so this seemed quite positive.

Also, any other news or updates you have heard? One thought I had as I became an investor in COCO. Clearly they are way undervalued compared to their peers. The three organizations with more students all have a MC or EV more than 10 times higher. And it does appear the market is turning – both for our competitors and in areas like guidance from COCO. Secondly, and as you have articulated well, it seems like COCO doesn’t even necessarily need the market to improve to go up – they have enough within the organization that they are already doing to improve margins that could significantly improve their bottom line.

batbeer2
Batbeer2 premium member - 7 months ago

Hi MFlyer, there is no important news that I know of. Looking forward to the upcoming earnings though.

I didn't know DeVry was happy about their healthcare buisness. Thanks!

At first glance that is indeed possitive for COCO, yes. However, if DeVry has turned while COCO has not, that wouldn't be so good. I'd have to look into the details to figure out why the one is doing (slightly) better and the other is not. Barring some local/geographical issues, the gap shoudln't be too big. We'll see what COCO has to say; I'll be back when the 10-q is out.

The ED didn't approve some of the new prgrams COCO submitted last year and I'll be very interested to see if there's some progress there. Not being able to launch new programs for a prolonged period is the largest risk I see.

batbeer2
Batbeer2 premium member - 7 months ago

Hi all,

The news today killed the thesis.

1) New student enrollements down 13%. While others in the space (for example DeVry) seem to be stabilising, COCO is (still) in free fall. In part, the thesis hinges on the idea that healthcare education should be retatively stable. The facts indicate COCO is not.

2) While the balance sheet is still decent, it is not nearly as good was. This can't go on.

3) Management is now seeking "strategic alternatives". This clinches it. COCO isn't going to be a long-term growth stock. Not if management gets their way.

I've spent a lot of money on this lesson so I'll continue to track this one to maximise the educational value. If I ever figure out where I went off the track, I'll write a post-mortem.

For now, I conclude that there's something company-specific amiss.

Maybe they've been singled-out by the ED or there's something wrong with the structure of the company. Then there's always the possibilty that management takes COCO private at the bottom (doing a Michael Dell (Trades, Portfolio)).

I'm out.

matti12
Matti12 - 7 months ago

Thanks for sharing your thoughts.

I've always liked reading what you have to say and I think you are very smart.

Do you think you it was a mistake picking a stock like COCO (I've seen you pick other stocks like NTE also) vs going the Pabrai route, i.e. picking a stocks that is already "endorsed" by a very good investor and by doing so increasing your MOS.

I am quite convinced that is the right thing for the majority to do. That and diversifying. I just wonder if being more knowledgeble got you into more trouble here? I don't mean this in any bad way at all.

Good luck going forward.

batbeer2
Batbeer2 premium member - 7 months ago

>> Do you think you it was a mistake picking a stock like COCO (I've seen you pick other stocks like NTE also) vs going the Pabrai route, i.e. picking a stocks that is already "endorsed" by a very good investor and by doing so increasing your MOS.

It's rational to stand on the shoulders of gurus.

BUT

While Pabrai earns a living by managing other peoples money, I'm here to learn. The bad news is that I expect to be a lot better in five years. It's bad because I can only achieve this goal if I come to see my current ideas as mediocre.

Does this mean I'm looking for mediocre ideas?

NO

It means I try to apply in the small-cap space what I learn from the greats in the large-cap space.

One thing I'm now better at, is recognising quality. I bought Bristow at a discount to liquidation and sold at a decent profit within months. A few years on, I've come to underdstand its comeptitve advantages better. I just hope I eventually understand my mistake with COCO as well as I now understand where I went wrong with Bristow.

By the way, Ruane Cunniff (Trades, Portfolio) bought some COCO not too long ago.

P.S.

If you think I'm smart, check my record. I sold Bristow in 2010 and subsequently bought COCO. I only wish that was my worst mistake. That one is too painful for me to talk about.

MFlyer
MFlyer - 7 months ago

Batbeer -
Interesting responses today. A few questions for you if you have time. Not that I was excited by what came out this morning, but it didn't seem as bad as you suggest. For instance, new students were down 13% and next quarter they are suggesting 16-18% - but over half of that is due to decreases in marketing and admissions ie. the company is coming out ahead net of marginal revenue and cost. Also, APOL was down 16% in the last quarter on new students; so COCO is actually better than the industry leader, and that is despite choosing to reduce enrollment to "better align costs with trends in the industry" as Jack says.

Second, long term debt is now down 30% Y-Y to 100 million. To put the current market cap in perspective to operating cash flow, they have made 50 mm this year in the first 9 months (it would have been 68 mm save Genesis, but they expect to recoup that in the 4 Q) compared to a market cap of 94 mm or so. As Trace said, this is absurdly cheap. I'd like your thoughts. APOL by way of comparison expects cash flow from operations in the 400 million range on a market cap of over 3 billion. The company can be bought today for almost 1 year of cash flows; their debt level appears manageable, even in a rough year - how exactly is their balance sheet unsustainable or their valuation ratios off?

Third, the company raised guidance by more than double in Q4 to 11-13 cents from a street estimate of 5 cents. Unless the business closes, that is a projected earnings yield of 44% compared to the broader market at about 5%. It seems to me that the company is focusing on the bottom line to as Jack said, "weather the current macro storm." And a few other things, the Q4 guidance the company provided is the highest in 2 years, and if achieved, would be the highest actuals in 3 years (and that is on a seasonally weak period). Also, they are guiding revenue to be down about 1% of Q3 actuals, whereas in the prior year Q3-Q4 period revenues were off 5%.

batbeer2
Batbeer2 premium member - 7 months ago

Hi MFlyer,

1) Yes, COCO is absurdly cheap on p/FCF. The balance sheet isn't bad (just not as good as it has been). I can understand why someone hangs on/buys for those reasons. The company is far from dead and if I had to go long or short, I'd be long.

Having said that, I prefer to own companies that are cheap and have good prospects. Maybe this explains why I don't own many stocks. Come to think of it, it might explain why some stocks I sell do well. In any case, for reasons I don't yet fully understand, COCO is failing my second criterion.

2) I think APOL is not a very good comp. COCO trains nurses, dental care assistants and mechanics. APOL aspires to be an alternative to university. A given student is probably not going to compare the two side by side. APOL's model scales up (and down) pretty well. They have more online stuff and I expect it is easier to hire (and fire) extra teachers for maths/law/accounting than it is for nursing. If it's about "adjusting to industry trends" APOL may be one of the best.

3) My reasons to sell:

- Management is now looking to sell the company. While it may be be a good reason to buy the stock, I prefer to put my money to work in something that I expect will be around in 10 years.

- COCO is blaming the lack of new enrollments (in part) on the weather. I don't want to be the owner of a school where students go only when the weather is nice.

- I think I understand the drivers for growth but there are clearly some counter forces that are inhibiting this. It seems I don't understand those counter forces well enough. If I ever (think) I do, I'll be writing about it. I may be back with one of the other for-profits.

My record in buying is satisfactory (at least to me) but my record in selling is much better. I think about half the stocks I've ever sold have tripled since. People out there have made a lot of money by buying the stocks I sell. I'm not making this up, I know some of them. To add insult to injury, they find it necessary to thank me. So if anyone out there is dumb enough to buy because I bought, please keep this in mind before you sell.

varunfriend
Varunfriend premium member - 7 months ago

>>> I've spent a lot of money on this lesson so I'll continue to track this one to maximise the educational value.

Amen brother!

My takeaway from the original thesis was :

1. cheap.

2. generating cash

3. fulfills a need

All of those still seem to be valid. I dont see a high probability of going bankrupt.

On the one hand, I am having trouble deciding what is the right path here based on the following two prescriptions:

1. Buy when there is blood on the streets

2. Being too far ahead of your time is indistingishable from being wrong

On the other hand, I now appreciate what Munger means when he says "It's not supposed to be easy. Anyone who finds it easy is stupid"

I feel a little less stupid!!

FWIW - I am holding on, not adding to the position and see how it plays out ...

swnyc2
Swnyc2 - 7 months ago

I think there are three reasons why the market really hates this stock:

1. Uncertainty regarding the AG investigations and the ED. These were addressed by the author of the article in the comments above, but I'm not so sure the potential penalties can be so easily dismissed. They are more than just potential for fines. For instance, I think the investigations caused the ED to freeeze the new programs COCO has applied for. Perhaps Massimo realizes that this could go on for a long time, and that time is not on his side. A sale of the company would give the ED political cover to let up on a new managament.

2. Uncertaintly on proposed federal regulations making it increasingly difficult for for-profit schools in general to enroll students requiring federal loans.

3. Student enrollment and revenue are decreasing.

18 months ago the author said, "The market mistakenly believes the cash flow is unsustainable — this business is toast."

With enrollment down and decreasing, a freeze on new programs by the ED, and new federal regulations coming, perhaps the market was not mistaken? To what extent was this knowable?

I have been long this stock for a while, and I've substantially added to my position on the way down. All along, I felt that the stock price was cheap compared to the underlying value of the company. I still feel that way today. But, also there is no doubt in my mind that the company's prospects have deteriorated over the past 18 months.

A rational person might sell and move on. I tried to sell some shares today, but just couldn't - because I think the stock is just too cheap. It's an interesting problem. I can see how investors can ride a stock down to zero. Perhaps, this is why Warren Buffet says he would rather purchase a wonderful company at a fair price, rather than a fair company at a wonderful price....

batbeer2
Batbeer2 premium member - 7 months ago

@ Swnyc2

Good points, thanks.

Hope my record for bad sells remains intact and your "inability" to sell pays off.

varunfriend
Varunfriend premium member - 5 months ago

From the 8-K: Looks like they maybe done if they cant get funding sources which they are struggling to get.

In the ordinary course such funds are available for drawdown by the Company within 24 to 72 hours of the request. However, ED has imposed an additional stipulation delaying drawdown of the requested funds for a period of 21 days. ED’s transfer of the Company’s schools from the Advance Payment method to HCM1 status, plus the imposition of the 21-day waiting period before drawing down funds, will adversely affect the timing of the Company’s operating cash flows and is expected to result in a significant shortfall in the Company’s operating cash flows. The Company is seeking relief from ED for the 21-day waiting period required by the June Letter, but has been unsuccessful to date in its efforts to obtain such relief. If such relief is not provided, the Company’s existing cash balances will be insufficient to sustain it through this transition period, and therefore the Company would need to immediately obtain other sources of liquidity, which may not be available. The Company has engaged in discussions with its credit facility lenders in order to obtain financing to bridge the shortfall in operating cash flows during this transition period, but the lenders have indicated they will not provide any such financing. If the Company is unable to timely obtain alternate financing, the Company’s cash flows will not be sufficient to meet its obligations as they become due, which would cause the Company to be unable to continue as a going concern.

swnyc2
Swnyc2 - 5 months ago

Ok. I'm out.

If the U.S. government wants to make an example out of COCO by putting them out of business, there's nothing COCO can do about it.

I read today that the governement would forgive the debt for those students whose school goes out of business --- so voters will not be unhappy with the government for shutting COCO down.

Looking back, I think the biggest tell was when Panetta left COCO's board...

batbeer2
Batbeer2 premium member - 5 months ago

Swnyc2 said: I read today that the governement would forgive the debt for those students whose school goes out of business.

WOW

So now you have some students who actually want COCO to fail.

varunfriend
Varunfriend premium member - 5 months ago

If the govt is forgiving debt then no one has the incentive to keep COCO going. I also dont understand though how they can run into problems of liquidity simply by having collections move from 3 days to 21 days.

Its interesting that lenders wont finance. because the same institutions dont seem to have issues lending to overleverd countries and companies at historically low rates.

I am out too. It was an educational ride.

batbeer2
Batbeer2 premium member - 5 months ago

The ED is taking over.

It seems to me the CEO is no longer in control of the school or for that matter its liquidation.

Jack Massimino says: "Throughout several days of intensive discussions with the Department, our goal has been to protect the interests of our students, 12,000 employees, taxpayers and other stakeholders,"

WOW. The interest of minority shareholders is not even mentioned. This does not bode well for the value of the equity. The schools are there but I think it is fair to say the ED has disowned the shareholders and will be dictating who's going to run those schools going forward.

This is looking more and more like Fannie Mae and Freddie Mac (on a smaller scale though).

AshishGupta
AshishGupta premium member - 5 months ago

I missed the ride. So how about a summary article on what your thesis for investing in it was and where did it go wrong?

If I remember correctly Manual of Ideas and a guru Lisa Rapuano was also bullish on COCO.

Is it the first major for profit education institution to go down?

batbeer2
Batbeer2 premium member - 5 months ago

>> how about a summary article on what your thesis for investing in it was and where did it go wrong?

When I figure that one out, I will.

varunfriend
Varunfriend premium member - 5 months ago

My 2 cents .. it was good idea with what was known at the time. There were signs that things were not going as well as we anticipated. Without the benefit of hindsight, it was improbable event that the ED would step in as it did. However, improbable is not the same as impossible.

For me this was a lesson in position sizing and risk control more than anything else.

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