For those of you who are not familiar with Corinthian Colleges (COCO), it's a for-profit company that provides post-secondary education services. It's most well known brand is Everest Colleges, but it has other institutions such as WyoTech and Heald College.
For-profit education providers have come under fire from regulators due to poor business practices. For-profit institutions are typically eligible to receive federal funding. However, the placement rates from these institutions have been incredibly low. COCO had a job placement rate of 16% for its graduates in 2012.
Regulation now states that for-profit schools cannot receive more than 90% of its funding from the federal government. This is referred to as the 90/10 rule. If these institutions cannot meet these guidelines they could risk losing most of their funding.
So far COCO has met most of its compliance requirements due to it shutting down lower performing campuses. While this is a good thing, it doesn't mean that the company is free from the regulators. The Education Department is giving until 2015 for these companies to meet the requested standards or they could lose funding. If COCO is not compliant by 2015, it could materially impact the bottom line.
While regulation is a concern, there are plenty of other issues with COCO. For one thing, the enrollment rate is falling considerably. In Q4 2013, the company enrolled 357 ability to benefit students. This is much lower than the same quarter in 2012, where 2,941 ability to benefit students enrolled. Ability to benefit students are individuals that do not have a high school diploma or GED. This population accounts for the majority of students in for-profit colleges.
So why is enrollment dropping?
Well, it's because these individuals are considered higher risk and are more likely to default on loans. This is a problem because it could impact metrics set in place by the Department of Education. So that's why COCO and similar institutions are trying to attract those with high school diplomas or GEDs. The problem with this is that most of these individuals are qualified enough to apply to a four year university or community college. These are places that have much better career services centers as well. There is a good article that goes over the elimination of aid to ATB students.
So overall the trend is declining for COCO. In the fourth quarter, the average student population was 84,585, down 8% from the same quarter last year.
Many investors might come back and say that the stock is still attractive due to the low P/B. As of June 2013, the company had total net tangible assets of a $184 million. Given that the company has a market cap of a $189 million, that's only a 2% premium. So in theory you could get the entire business for only pennies on the dollar, right?
Well not exactly. Keep in mind some of its assets are not exactly easy to liquidate. For example, the company has had a difficult time selling 2 of its WyoTech campuses. There are also significant non-recurring charges related to discontinued operations in regards to other campuses. So the assets are not exactly top notch that could be liquidated easily.
The other issue is that the market is pricing in the concern over the potential loss of funding from the federal government. This is key here because the majority of the revenue is from these programs. If this goes, then the company's bottom line will get decimated.
Management has given a FY 2014 EPS guidance of $0.10 - $0.15 cents per share. Even assuming the higher end of the guidance, that's still a 14.6 P/E based on the current share price. This guidance also assumes that management can reduce $40 million in expenses in 2014.
I believe a 14.6 P/E is just incredibly high given the risks associated with this company and for the industry in general. I project a P/E of 9 to be sufficient given the declining trend in revenue as well as looming issues related to federal funding.
Assuming a $0.15 EPS, which is the high end of the guidance, this equates to a share price of $1.35. This is a 38% decline from the current share price. I believe this is a good short candidate as the market has not fully recognized the issues with the industry.
The government is looking to cut costs for programs that are simply not benefiting the public. For-profit institutions can receive 90% of their revenue from the federal government. The government will ask if these institutions deserve such a large amount of taxpayer money considering that companies like COCO only had a 16% job placement rate. Between 2010 and 2011, for-profit colleges received $32 billion in financial aid. I believe this is a number that is very likely to be cut going forward.