February 2, 2010
Corinthian Colleges
Q210: Margins Rise, but
Slowing Starts Could Hinder
Further Improvement
Investment conclusion: Sentiment is improving for
COCO as investors become more confident it will trim its
exceedingly high cohort default rates (CDRs) through
internal outreach programs and government help for
lower-income students (such as the current income
based repayment program and President Obama’s
proposal to expand it to middle-class borrowers). In
addition, regulatory concerns weighing on the industry,
most notably the gainful employment proposal is less of
a threat to short-term programs, such as those offered
by COCO. While it has done a good job repairing its
operating results, we think difficult comps, an improving
economy (which will lessen the countercyclical impact
on demand) and a bigger focus on quality of students (to
control CDRs) will make further margin growth harder as
start growth slows and operating leverage diminishes.
What's new: Q2 financial results were strong, with
operating margins of 15.6% (vs. our est of 14.7%), led
by lower bad debt of 5.8% (vs. our est of 6.5%). Start
growth of 10.7% missed our 12% estimate (but was in
the 10-12% guidance range). Q3 guidance for starts of
6-8% is a y/y deceleration and is below our estimate.
Valuation: At 8.3x C2010 and 7.3x C2011 versus the
group’s average of 15.3x and 12.3x, COCO trades at the
lowest P/E multiple in our for-profit education coverage.
This discount reflects concerns over long-term growth,
given the potential impact of high CDRs. However, if it
can improve CDRs, the stock could recover.
What's next: The Department of Education (ED) will
release draft 2008 CDRs to schools on Monday
(February 8), which will be an important data point when
the company discloses it to the public. Management
previously said it expects 10 to 15 schools to have 2-yr
CDRs above the 25% threshold, endangering its Title IV
eligibili