- 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.
Catalyst
- 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.
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.
Catalyst
- 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.
