Investors learned a lesson about how a fast-rising stock can come down to earth even quicker at Corinthian Colleges Inc.
Santa Ana-based Corinthian Colleges was one of Orange County’s best performing stocks this year before the company announced quarterly results on Aug. 30. Since then, the for-profit college operator has seen its stock crumble as investors fled on fears its shares were overvalued amid slipping profits.
Before all trading was halted last week, Corinthian shares were at about 27, down from a 52-week closing high of nearly 53 on Aug. 30. Since then, the company saw its market value go from $1.1 billion to about $575 million last week. Corinthain’s price-to-earnings ratio fell from a lofty 43 to 23.
Corinthian “had high valuations,” said Richard Close, an analyst with Atlanta-based SunTrust Robinson Humphrey Capital Markets. “The market was looking for a perfect, perfect quarter.”
While not perfect, Corinthian’s results for its fourth quarter ended June 30 were notable in this economy. The company said operational income rose 69.5% to $11.7 million in the quarter, while revenue increased 44% to $66.4 million.
The results were in line with expectations. The rub: Corinthian warned results for the current quarter could be lower than expected because of higher bad debt expense related to a regulatory change in the way it refunds tuition to dropouts with government loans.
The market reaction was swift. The next day, Corinthian’s shares dropped 25%. That was followed by another 12.5% drop on Sept. 4 when the market reopened after the long holiday weekend. In the six trading days following the results, Corinthian shares lost nearly 40% of their value.
“It is a classic case of a company that has done well but the valuations got ahead of the stock and expectations became unsustainable,” said John Prichard, portfolio manager at Newport Beach-based Knightsbridge Asset Management LLC who’s familiar with Corinthian but is not an investor in the company.
Corinthian runs 56 colleges offering diplomas in healthcare, electronics and information technology. The for-profit education sector normally booms in a slower economies as employees, laid-off workers and other students take up extra classes to boost their skills.
And, with lower interest rates, education is more affordable to students borrowing money to pay for tuition.
So what happened at Corinthian?
Company officials were not available for comment for this story. But analysts say perceived overvaluation is one problem. The other is bad loans.
Most analysts, investors and the company itself forecasted a lower rate of bad loans from students. But in the recently concluded quarter, bad debt expenses were about $1.1 million higher than Corinthian’s own forecast. Without bad debt expenses, the recent quarterly earnings would have been three cents higher, according to analyst Close.
The higher debt expenses were prompted by an October change in the Federal Title IV student financial-aid regulations regarding the amount of aid refunded to the government when a student withdraws before completing a course. This regulation shifts the onus of collecting loans from the government to school operators.
“They had thought that implementation adjustments were implemented for that change,” Close said of Corinthian’s executives. “They made some adjustments in January and February, and they saw the bad debt expense decrease in their third quarter. But then it popped up in the fourth quarter. And that led to higher-than-expected bad debt.”
A falling gross profit margin is another concern. While Corinthian had a 44% growth in revenue for the quarter, the company saw its expenses related to education rise faster,at 48%.
“This was due to a large number of programs and new schools that the company opened up combined with higher bad debt expense,” Close said. “That is the why the gross margin was down year over year.”
But Close, who still has a buy on the stock, contends the fall in Corinthian’s stock could be a good thing for new investors because of the company’s relatively good fundamentals.
Close said he believes Corinthian should be able to manage its debt problems.
“They have since then brought in an outside credit manager, hired a team and have implemented a collection policy to sort of offset a change in the regulation,” he said.
Also, the company has seen 22% revenue growth from its existing campuses this year. Corinthian should be able to grow revenue at a 20% to 25% clip in the future, Close contends.
“There is an opportunity for them to exceed expectations going forward,” he said. n
