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The bull case for Corinthian Colleges

August 23, 2010 | About:
- EDIT 29 Nov 2012 - This analysis has been updated here.

I don't like using calculators so I use round numbers. The source of most of my information is todays 10k. http://www.sec.gov/Archives/edgar/data/1066134/000119312510194326/d10k.htm

Corinthian colleges is one of the largest for-profit post-secondary education companies in the United States and Canada, serving those seeking to acquire career-oriented education. As of June 30, 2010, Corinthian Colleges had a student enrollment of 110,580 and operated 101 schools in 25 states, and 17 schools in the province of Ontario, Canada. Training program areas include healthcare (nursing, ±50%), criminal justice, mechanical (HVAC ±20%), and information technology.

Investment thesis

The common stock of Corinthian Colleges, at $4.5, trades at 8x a pessimistic estimate of earnings power. This does not take into account the recently announced 200m share buyback; it does take into account the possible impact of new rules proposed by the Department of Education.

The opportunity exists because

a) Cohort default rates have an impact on the ability of students to participate in title IV funding. Students with title IV loans generate 89% of revenue.

b) One of the institutions, Everest College Phoenix, may to lose its accreditation.

A) An institution will lose its eligibility to participate in financial aid programs if defaults by its former students equal or exceed 25% per year for three consecutive years, or 40% for a single year. This means an institution must manage its operations so it has a default rate below 25% for at least one year in every three. Is that hard to accomplish ? Just make sure less than 50% of your students default on their loan within 3 years.

For the 2008 cohort (those trying to get a job in 2009) default rates at 10 of Corinthians 50 institutions exceeded 25%; the worst default rate was 35% at Everest Institute, San Antonio. Arguably, the US is better of without such schools. Interestingly, > 70% of students are at institutions with default rates below 20%. Corinthian Colleges, this year, acquired Heald colleges. Default rates at 8 of its 9 institutions are 10% or less. One has a default rate of 15%.

Management has not been asleep. It significantly reduced the number of ATB students. ATB students (without high school diploma) default on their loans at a rate in excess of 40%.... annually ! ATB students were 25% of the 2008 cohort; now 15%. This policy alone should bring down default rates by 5 percentage points at the expense of growth. Even with this measure in place, student starts increased 17.5% to 137,831 for the year ended June 30, 2010.

If management does nothing, Schools with default rates exceeding 25% for three consecutive years will be run off (no new Title IV students). By 2013..... Corinthian colleges will be forced to shrink its student population by 30% or more precisely, by such a number that the default rates drop below 25% for one cohort. This assumes unemployment remains at 2009 levels through 2013. Unemployment is what drives defaults. The correlation for defaults on student loans was also noticeable in 1992/93.

The bread and butter of Corinthian Colleges is the diploma business. Yes or No; you either have that diploma that is required for the job or you don't. Also, courses typically take two years. Any action taken by management is likely to be effective in a timely manner. I expect default rates for the 2009 cohort to be better. That cohort has fewer ATB students; they seek employment in 2010.

B) Everest College, Phoenix has 4500 students; 5% of revenue. If this school loses it's accreditation, new students may not enrol.

Earnings power

I believe a pessimistic estimate of earnings power is an average of earnings over the last five years; 50m. Average student population in that period was 75k; now 110k.

On the current 90m shares that is 55cts per share. Assuming Corinthian manages to buy back just 25m shares with 200m in cash, that makes it 75cts of earnings per share. Buying back just 25m shares means they drive the price up over $7 doing it.

Specific Risk

- High unemployment going forward; this is what causes high default rates.

- Reputation is damaged causing low demand for its diplomas.

- Accreditation boards toughen up.

- The company reverses its decision to buy back shares.

- The company breaks the 90/10 rule. Meaning more than 90% of revenue comes from loans. This will cause enrollment of title IV students to cease, temporarily, at those institutions.

The 20 000 other risks I have not thought of.


- Spending 200m (40% of the current market cap) to buy back shares. http://www.sec.gov/Archives/edgar/data/1066134/000129993310002901/htm_38549.htm

Any and all questions or comments welcome as usual.

About the author:

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. I can be reached at batbeer AT hotmail DOT com

Visit batbeer2's Website

Rating: 3.5/5 (26 votes)


Whitebeach23 - 7 years ago    Report SPAM


Keep it up. You are very honest with your reasoning. I look forward to your next hypothesis.

Good Luck.

Aagold - 7 years ago    Report SPAM


Seems like there are several crucial things left out in your analysis.

1) What do you believe is a reasonable P/E multiple for COCO? You mentioned that at $4.50 it's 8x a pessimistic estimate of earnings power, but you never said what would be a "fair" multiple.

2) Why no mention of the new "Gainful Employment" proposed legislation, and COCO's horrendous principal repayment rate? These are the recent news items that have caused COCO stock to plummet.

3) Your method of estimating long-term earnings power seems a bit too simplistic, given issue (2) above. Is there any way to estimate earnings power that takes into account enrollment declines necessary to comply with upcoming government regulation?



P.S. Unfortunately I'm a COCO shareholder who intially got in at about $15/share. Given all that's happened, I'd like to find some way to place a rational fair price on COCO stock, but it seems like a really difficult analysis to attempt.
Batbeer2 premium member - 7 years ago
@ Whitebeach23

Thank you, I do these articles so poeple here can poke holes in them; see where the flaws are.

Case in point ;-) ....

@ Aagold

Thanks for the comments and questions.

1) I have no idea what a fair multiple would be. My rule of thumb is that a 7x multiple corresponds to a 15% yield. If I can get a high ROE business at a 15% earnings yield forever (read: "there is no multiple expansion").... fine.

Earnings power may be obscured in many ways. For Corinthian, I believe owner earnings exceed GAAP earnings due to high (growth) capex.

2) There is IMO little of substance to be said about gainful employment. In my view, there is a high correlation between cohort defaults and the inabilty to obtain gainful employment. An analysis of the negative impact of the rules surrounding gainful employment would be double counting bears.

Having said that, here's my best shot....

The typical healthcare student (say dental assistant) leaves Corinthian with 8k of debt. This student must earn 17k by the new government standards to service that debt.

The HVAC diploma student leaves with 20k debt. This student needs a 33k salary.

These courses take 2 years or less, management can pull levers to adjust the mix, cut costs etc. in reaction to new rules and conditions. Cutting costs by 10% would reduce the ammount of debt students take on by more than 10%; say 12%. This has a huge impact on "gainful employment."

Take APOL or EDMC with their multi-year bachelors courses. The typical student leaves with 60k of debt and needs a 85k job to service that. These are students earning 25-45k. They are expected to jump to 85k with that degree.... I'm quite bearish on APOL and very bearish on EDMC.

In short, This is not going to kill all the for-profit institutions. It is going to harm those that are unable to adapt. IMO Corinthian is in an excellent position to adapt due to the nature of its core curriculum.

3) It's simplistic, true. I have seen more elaborate models. However, if these new rules cause Corinthian to shrink their student population by 30% to comply....

- That would leave a lot of the performing students and eliminate some others.

- That would eliminate some of the advertising and admission costs; now 20% of revenue.

50m is much less than they spent on advertising alone when they last had 75k students. Going through the old numbers would probably get you an estimate of earnings power of at least 100m on 75k students in a no-grwoth scenario. I for one would be surprised if they earned less than that in coming years. The estimate above IMO is pessimistic. We shall see.

Again, I use rough numbers; please share any estimates you have that are more accurate.


I'm very optimistic about the long term prospects of the company. I just don't like to pay for those prospects. The US will need more nurses and the like going forward. They must be trained somewhere. 10k IMO is not a lot for the value added. It's current unemployment that is wreaking havoc with these cohorts.
Batbeer2 premium member - 7 years ago

Another way to look at this is that Corinthian is selling debt at ± 4% to buy back shares yielding 35% on earnings. 35% on current earnings that is, not on my estimate of earnings power.

The last time I saw this was with Lexmark.... http://www.gurufocus.com/news.php?id=61280

- EDIT - Should you want to short Corinthian, it's much better to short the bonds if you are able to.

A pair trade of the bond and the stock would be a classic value play. IMHO the spread should be 8 percentage points at most. It's now over 30 percentage points.
Batbeer2 premium member - 7 years ago
Insiders are loading up !
Batbeer2 premium member - 7 years ago

If a program does better than the department's preferred standard on any one metric -- 8 percent debt-to-earnings, 20 percent debt-to-discretionary income, 45 percent repayment rate -- then it is fully eligible for Title IV. If it meets none, it becomes totally ineligible, unless an appeal is successful. If it meets the minimum standards for one metric -- a debt-to-earnings ratio between 8 and 12 percent, a debt-to-discretionary income ratio between 20 and 30 percent, or a loan repayment rate between 35 and 45 percent -- it gains access to the federal financial aid programs on a "restricted" basis.

Some interesting effects:.

- Applying the rules on the program level is a positive for Corinthian. The terrible statistics you see floating around the Internet (and the ones I used in my analysis) are at the institution level.

- The rules could have been applied in the AND form - you need to make all the metrics to be fully eligible. However, they will be applied in the OR form. Meet any metric and you remain eligible.

- Repaying $1 dollar of principal on a $ 10k loan causes the entire 10k is added to the repayment rate. The loan repayment rate is not based on the percentage of former students repaying the principal on their federal loans.

All this means a 30% decline in the number of students now seems unreasonably pessimistic to me.
Batbeer2 premium member - 7 years ago
Education Secretary Arne Duncan:

"Let me be clear: we're moving forward on gainful employment regulations. While a majority of career colleges play a vital role in training our workforce to be globally competitive, some bad actors are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

Batbeer2 premium member - 7 years ago
>> Buying back just 25m shares means they drive the price up over $7 doing it.
Batbeer2 premium member - 7 years ago

SANTA ANA, Calif., Oct 12, 2010 /PRNewswire via COMTEX/ -- Corinthian Colleges, Inc. (Nasdaq: COCO) reported today that its President and Chief Operating Officer, Matt Ouimet, has given notice of his intention to resign from the Company effective October 31, 2010. Ouimet joined Corinthian in January 2009.

Shares drop back down below $ 6
Batbeer2 premium member - 7 years ago

BANGALORE, Oct 13 (Reuters) - Apollo Group Inc (APOL.O), the biggest for-profit U.S. education company, blamed an uncertain regulatory environment for withdrawing its 2011 outlook and warned of a significant drop in new enrollments, setting a dismal tone for an industry facing intense government scrutiny.

Apollo stock fell 15 percent after the bell, and dragged down other education stocks which have been volatile for most of the year on fears that new regulations will chop off the rapid growth witnessed by the industry even last year.

COCO shares drop below $ 5

Superguru - 7 years ago    Report SPAM
From Investopedia,In August, education stocks dropped an average of 20% thanks to the Department of Education's proposed "gainful employment" rule that would restrict the amount of federal loans available to schools where less than 35% of the students with federal loans are repaying the principal on those loans.

Corinthian has one of the lowest rates of repayment of the for-profit companies so it's easy to see why the stock has dropped more than most. Originally scheduled for a November 1 publication, the rule will appear sometime in early 2011, long after the mid-term elections are in the books. A lot can change between now and then. But let's assume revenues get cut in half from $1.8 billion to $900 million because of the rule. COCO still make money, although nowhere near the $1.65 a share it made in fiscal 2010. A 50% drop in EPS to 83 cents translates to a forward P/E of 7.6. That's still cheap for a company whose repayment rates aren't much different from many public institutions. A compromise will be reached at some point. If so, it's game on.

Softdude2000 - 7 years ago    Report SPAM

Thanks for great articles.

(1) What is the relative cost for a student to get training for a typical course in COCO versus public institutes or non-profit community colleges? Is it more expensive to be trained as a nurse in COCO than in community college or is it significantly cheaper to get trained in non-profit college for similar course?

(2) Are students joining for-profit colleges because they are not eligible for non-profit enrollment? Are they joining for financial reason or for convenience?

Batbeer2 premium member - 7 years ago
Hmmm... good questions ! I do not have the answers; you just found something for me to do :o)
Softdude2000 - 6 years ago    Report SPAM
Batbeer, have you seen this article?


Do you think COCO is better value than BPI?
Superguru - 6 years ago    Report SPAM
It is very hard to pick winners and losers in for profit education . I am thinking this is one place basket may make sense.

Batbeer2 premium member - 6 years ago
What is the relative cost for a student to get training for a typical course in COCO versus public institutes or non-profit community colleges?

The cost for two-year public college tuition is about $2 500 per year. For-profit or for that matter not-for-profit private two-year colleges cost about $12 000 per year.





Interestingly, international students at public colleges pay more than they do at private colleges.

Attending a public community college will help offset the costs if a student decides to continue toward a bachelor's degree. Public community college students do not accumulate debt early on. Public two-year colleges are typically geared toward further education while the private one is geared toward getting you a (better) job.

In short, a student will prefer public college if given a choice. It's much cheaper for that individual.

Now some random thoughts....

Typically, you will find two accredited colleges in a state. Healds Honolulu is an example. One publicly funded and one private. In the private school, students rely heavily on title IV funding (a national system). The public college relies on state funds.

I get the impression state budgets do not allow for rapid expansion of public colleges..... enter for-profit private institutions. The public institutions just don't meet demand.

In the grand scheme of things, I think title IV funding will grow while state funding will not. Title IV loans are precisely that, loans. Repayment may be terrible given current unemployment, but compare that to state funds that never ever return..... and you see the future of US two-year college education.
Batbeer2 premium member - 6 years ago
Are students joining for-profit colleges because they are not eligible for non-profit enrollment? Are they joining for financial reason or for convenience?

If, as an adult, you decide you want to become a nurse and wish to do so quickly at a school focussed on getting you a job as a nurse, you will go to Corinthian. The public (state funded) alternative is:

a) full

b) not geared toward your needs

c) a lot cheaper

Only "c)" it seems is likely to change in the foreseeable future. If "c)" doesn't change, "a)" will get worse.



Batbeer2 premium member - 6 years ago
Do you think COCO is better value than BPI?

BPI seems cheap too. It has a MUCH shorter history though. I'm not sure the added value is comparable.

They are focussed on online courses which is a great business but also one with low barriers to entry. Why would they outperform APOL or WPO in that space ?
Softdude2000 - 6 years ago    Report SPAM
Batbeer, thanks for your thoughts.

From that article in my previous comment, BPI is offering courses at almost 50% discount to the price of APOL or WPO. So I think BPI is better than APOL. I wont compare with WPO because WPO has other assets than Kaplan to protect us. I have problem comparing COCO with BPI to understand which is better investment. I am going with COCO because it is cheap compared to book value and long history of p/e. I do not know if it is possible to offer nurse training online which is half of COCO business. I will wait to see if BPI will fall in price. At this point I am not considering APOL.
Softdude2000 - 6 years ago    Report SPAM
I think there is no moat for any for-profit colleges. Just they are cheap compared to past earnings. So I am actively looking and buying little.
Superguru - 6 years ago    Report SPAM
Batbeer - are you long COCO or only presenting an idea.
Acreatn - 6 years ago    Report SPAM
COCO is dirt cheap, its BV/share is 691M (SE) / 88.2 M (Shares) = $7.83 !

That's like so high away from its current stock price trading at only $4.59

I did residual income model valuation on it, cost of Equity = 10%, and forecasted the growth in net income (NI) for subsequent 5 years to be, -60%, -20%, 20%, 40%, 60%, with a terminal growth of 3% thereafter. I came to a valuation of $9.738 and that's very conservative already.

Regarding the company wise, I not too sure about its operations, its risks, so on. Tell me your take on it.

Batbeer2 premium member - 6 years ago
The Washington Post with Buffett on the board bought a 10% stake; it can't be all bad.

Having said that, I like the business more than I like management. COCO pays its executives and board members too much and there are too many of them. IMO it's a takeover target. The CEO (old COO) has taken over the duties of the recently departed COO.

The untimely departure may have something to do with recent litigation. In any case, fewer executives at COCO is a good thing. They bought Heald which had IMO good management. Let the Heald managers do the job for the entire enterprise.

My 2 cts.
Batbeer2 premium member - 6 years ago


Comparing the first quarter of fiscal 2011 with the same quarter of the prior year (unless otherwise noted, all comparisons are “as reported”):

• Net revenue was $501.7 million versus $388.5 million, up 29.1%.

• Total student population at September 30, 2010 was 113,818 versus 93,493 at September 30, 2009, an increase of 21.7%. On a pro forma basis, including the Heald student population at both September 30, 2010 and September 30, 2009, the total student population increased 7.7%.

• Total new students were 41,075 versus 36,737, an increase of 11.8%. On a pro forma basis, including Heald’s new students in both Q1 10 and Q1 11, new student growth was 0.5%. Excluding the impact of discontinuing ATB enrollments, pro forma new student growth was 5.1%.

• Operating income was $56.1 million, compared with $53.9 million.

• Net income was $33.1 million, compared with $32.9 million.

• Diluted earnings per share were $0.38 versus $0.37.


OK, no surprises here.


Share Repurchase

In September and October, the Company spent $25 million of its $200 million total Board authorization for repurchasing shares. In total, 3.9 million shares were repurchased at an average price of $6.38 per share. Given the current uncertainty in the regulatory environment, we do not plan to repurchase additional shares in the near term.


&^!%!#mn ! The share price drops and they stop buying. Well.... they used the cash to eliminate some debt.... IMHO not the smartest of moves but it could be worse. This will take longer though; the catalyst gone.


On September 15, 2010, we met with an HLC Review Committee. Subsequent to the meeting, we received a letter from HLC in which it reported that the Review Committee disagreed with the evaluation team’s recommendation, and, instead recommended continued probation for ECP. Both the Evaluation Team and the Review Committee will forward their recommendations to the HLC Board of Trustees for review and action. We expect HLC’s board to make a determination on ECP’s accreditation status in November. If we disagree with the HLC board’s decision, we could pursue an appeal that could last for several months beyond that time.


OK, that could have come out much worse.


Based on current information, we expect that all of our institutions will be able to comply with the Rule for our fiscal year ending June 30, 2011. When the first portion of 90/10 relief under the HEOA expires in fiscal 2012 (starting in July 1, 2011), we believe that – if we don’t take extraordinary action – a substantial percentage of our institutions would be above the 90% threshold in that year.


Now that is a key risk ! There is still time but I'll need to watch this one closely.


After 90/10 relief expires, the primary alternative for keeping our institutions under the 90% threshold is to substantially raise tuition pricing. An increase in tuition prices above the applicable limits for Title IV loans and grants effectively creates a funding gap that requires students to obtain other sources of funding to pay for the remaining tuition balance. This would have the effect of reducing the overall percentage of revenue from Title IV sources.


Ah ! that's smart. Little chance for competition to get in. If they try, they'll get all the excluded title IV students. The competition is probably NOT looking for extra at-risk students at this point in time.

In short, nothing here that kills the thesis.
Softdude2000 - 6 years ago    Report SPAM
I was surprised that they cant even generate 10% of revenue without title IV funds. When I was reading this rule before this quarter results, I thought it was not a big deal.

Looks like board is full of business people(salesman) than education professionals. If we read short biographies, we would n't guess this is college management team. So much for salesmanship!! I wish I understood this early on in life.

Another issues that makes me uneasy is that lots of profits generated all these years was used for acquisitions which may increase revenue but will not add to moat and not even to real assets. Most college buildings were leased and what happened to all profits? Looks like business is more like rent a place and stick a display board 'COCO college' and get as much fees as you can, pay something to faculty, eat as much as you can and buy another 'display board' (acquisition) with remaining cash.

But I decided to stick with my small position till good times come. Not very excited to hold but I think it is not over valued.

Superguru - 6 years ago    Report SPAM
Another round of Downgrades and stock prices decline in for profit education companies.

Batbeer2 premium member - 6 years ago
Corinthian Colleges, Inc. announced today that Peter Waller has resigned as chief executive officer and as a member of its board of directors. The Board has appointed Jack D. Massimino as the new chief executive officer, effective immediately. Massimino will also continue to serve as chairman of the board.

Massimino served as CEO from November 2004 until July 2009, when he was named executive chairman of the board. He has served on the Board since 1999.
Batbeer2 premium member - 6 years ago
November 2010 (10q):

In September and October, the Company spent $25 million of its $200 million total Board authorization for repurchasing shares. In total, 3.9 million shares were repurchased at an average price of $6.38 per share. Given the current uncertainty in the regulatory environment, we do not plan to repurchase additional shares in the near term.......

March 2011 (10q):

During July 2010, the Company’s Board of Directors approved a stock repurchase program under which the Company may purchase up to $200 million of its common stock. Corinthian plans to repurchase shares on the open market or in private transactions from time to time....

Spot the difference !?

That's $ 175m worth of stock they plan to buy back on a market cap of $350m.... they could if they wanted to and IMO they should.
Superguru - 6 years ago    Report SPAM
COCO is getting killed. Any news?
Batbeer2 premium member - 6 years ago
Nothing that IMO affects the thesis..... yeah it's really getting hammered.
Batbeer2 premium member - 6 years ago
This article is almost a year old so the new 10-k should be out soon. The stock is currently at $ 2.6 for a market cap of $ 220m.... WOW !

FWIW I still think this company has an earnings power of at least $ 0.50 per share.

That's not to be confused with an estimate of earnings in any given quarter.
Superguru - 6 years ago    Report SPAM
Well today's earnings explain why no insider was buying even at so called cheap prices.

Batbeer2 premium member - 6 years ago
OK, IMHO this was cheap and now it's absurdly cheap. This reminds me of crox.

Superguru - 6 years ago    Report SPAM
Why are we not seeing more consolidations or M&A in for profit education industry?

May be two together will go down faster than one alone.
Batbeer2 premium member - 6 years ago
From the latest 10k:


.... At the end of fiscal 2011, the Company delayed drawing down approximately $87.0 million of Title IV funds (which were subsequently collected in July 2011 within the appropriate ED payment periods) to help its institutions comply with the 90/10 rule for fiscal 2011.

That's $ 85m of cash on the balance sheet today that didn't show up on the balance sheet dated June 30.


... Corinthian plans to repurchase shares on the open market or in private transactions from time to time, depending on the company's cash balances, general business and market conditions, and other factors, including alternative investment opportunities....

They're starting to buy back shares again. In November they stopped "due to regulatory uncertainty". The uncertainty is gone and the're are back at it. Good ! the catalyst from the original thesis is back in play.


Capital expenditures amounted to $110.7 million in fiscal 2011, $83.5 million in fiscal 2010 and $49.5 million in fiscal 2009. Capital expenditures were incurred to build, relocate, remodel and enlarge campuses. During fiscal 2011, we incurred capital expenditures to build 6 new campuses, relocate 1 campus and to enlarge or remodel 28 campuses.

They spent a record amount on capex this year. They spent $ 110m updating PP&E now worth $ 350m. This is not what I think of as maintenance. Looks to me like new management has done all it could to make the numbers look terrible.
Batbeer2 premium member - 5 years ago
Corinthian reports its results for the quarter.

In a year they've reduced long-term debt from $ 317m to $ 7m. About $ 75m of that debt is still there but it's now listed under "current".

In my book, that's 310-75 => $ 235m of owner earnings for a company with a market cap of $ 330m.

IMO the thesis is still valid. In any case, the company will be spending about $10m less on interest. $ 12m of GAAP earnings for the quarter is roughly equal to my original estimate of earnings power of $ 50m per annum.

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