FUNDAMENTAL FEATURE - Corinthian Colleges (COCO)

Investors Give COCO an “F”, Shares Plummet 19%

On Tuesday August 26, before the market open, Corinthian Colleges Inc. (COCO) reported a Q4 loss of $0.01 per share or $620,000 on $274 million in revenue vs. a loss of $0.10 per share or $8.756 million on $231.62 million in revenue a year ago. Excluding charges, COCO would have earned a profit of $0.11 per share. For the full fiscal 2008 year, COCO earned $0.25 per share or $21.3 million on $1.07 billion in revenue. Shares gapped down opening at $15.58 and sold off throughout the day to close at $13.09, down 19.3% on 11.16 million shares

COCO expects Q1 2009 earnings of $0.06 - $0.08 on revenue of $285 million - $290 million. Analysts expect earnings in the high range of $0.8 and below the company’s forecast at $283.3 million. For the full fiscal 2009 year, COCO expects earnings of $0.58 - $0.63 per share on $1.21 billion - $1.25 billion in revenue. Analysts expect earnings below the company’s guidance at $0.55 on $1.22 billion in revenue.

Student enrollment increased 7,879, up 13% to 69,211 students for the fiscal year and for Q4, enrollments increased to 2,372, up 11.5%, to 23,015 students. However, students with lower credit scores had difficulty obtaining student financing. Student loan defaults rose to 9.1% vs. 6.2% a year ago and increased expenses to 61.1% of revenue vs. 59.6% in Q4 2007.

COCO also reported a loss from discontinued operations from several closed/sold branches in Canada, Boston, MA, Oakland, CA, Atlanta, GA, Everett, WA and Lynwood, WA. The loss amounted to $5.4 million. The Atlanta branch closed due to accreditation problems and a $4.8 million loss on student loan receivables in the Marietta and Jonesboro, GA Atlanta branch. This wasn’t the only time COCO had problems.

In July 2007, COCO reached a settlement with the CA Attorney General by paying a fine of $6.5 million and closing 11 programs at 9 California campuses. In October 2007, The Dept. of Education served a search warrant at COCO’s Ft. Lauderdale, FL campus to acquire numerous documents and records. In November 2006, the SEC reviewed instances of stock option backdating and since then, did not proceed with enforcement actions.

On Monday, August 25 (day before earnings), Sallie Mae (SLM) announced that they will no longer provide “serial” subprime student loans This is bad because SLM’s loans make up 90% of COCO’s private loan portfolio in the U.S., 75% of which were subprime in 2007. In addition to SLM, College Loan Corp. and Student Loan Express both reported that they will no longer provide subprime student loans, which went in effect in March. As a result of SLM’s decision, COCO instituted the new ACCESS student lending program, and along with Title IV and cash, COCO was able to arrange financing for the vast majority of students.

The Higher Education Act, signed by President Bush in July helped COCO meet requirements of the 90-10 Rule, which requires that at least 10% of an institution's revenue, on a cash basis, be derived from non-Title IV sources. 2 changes were made to the rule this year: 1) a school will be able to count as non-Title IV revenue that portion of any Unsubsidized Stafford loan received by a student that exceeds the max. loan amount under the law prior to July 2008, and 2) a school will be able to count institutional loans as non-Title IV if a) loans are based on enforceable IOUs, b) loans are issued at enrollment intervals, and c) loans are subject to repayment and collection. The rule helped put pressure off of COCO by helping the company meet requirements without hiking prices.

The outlook for this industry is neutral to negative. Given the economic downturn, I believe that many students, especially subprime loan recipients, may still be unable to properly qualify. Those that do qualify are higher likely to be unable to pay the loan back on time, even with special loan programs available. However, an increase of unemployment may stimulate enrollments for individuals seeking to learn additional skill sets. A wave of regulatory inquiries into unsound business practices and the continued unavailability of credit should dampen the entire industry.

Currently, 12 firms publish recommendations for COCO, with 5 “Buy” ratings and 7 “Hold” ratings.

On August 18, Lehman Brothers reiterated their “Overweight” rating and RAISED their target price to $18 from $16! (That isn’t going to happen). Insiders have a pretty good record of when to buy or sell. Over the past 12 months, insiders purchased 25,500 shares and sol 183,112 shares. The shares were sold September – December, right before the stock got crushed from $18 to $8. The purchases were made in May – June at $11-$12. COCO traded at $13.27 as of Friday.

Technically, COCO formed a large breakaway gap, which in this case signals the beginning of a major downtrend. The gap formed on huge volume and also failed the 50-day MA, and has now become a confirmed short candidate.

Full Disclosure: None, but will consider shorting COCO on Tuesday.