Corinthian Colleges, Inc. (COCO)
(January 27, 2005)
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Dear readers, please note that COCO has just reported earnings this morning (22 cents per share vs. an estimate of 21 cents per share) and will host a conference call to discuss earnings guidance at noon ET today.
I also will not write a weekly commentary on individual stocks/industries next Wednesday evening - due to the fact that I will be making a presentation to a local business organization here in Houston during that evening. I will try to focus more of my time and efforts to that presentation this week and the early parts of next week.
Like I mentioned last week, I will try to devote more of my time and effort to the study of individual industries and stocks during 2005. As stock traders and investors, we as a group does not believe that the market is efficient - in fact, I have never doubted that the market is not efficient. I have always believed that the amount of profits that you take away from the stock market over time is directly proportional to the amount of time one dedicates to the study of the stock market - whether it is the study of individual stocks, industries, history, or one's own psychology and temperament when it comes to handling money.
The post secondary, for-profit, education services industry is probably a no-brainer when it comes evaluating potential growth for the foreseeable future. Americans are living longer lives and are spending more time in school. We are also living more affluent lives, even though the gap between the rich and poor has been expanding over the last few decades. The trend of increased spending on post secondary education services will continue - recession or no recession. In fact, one can even argue that people will spend more time and money on education services in a recession - as people reeducate themselves in technical professions in order to have a better chance of finding a job.
Let's first discuss the concept of a "skills gap." According to the Monster.com article "The Skills Gap and the American Workforce," the advent of the information economy has required us to become "knowledge workers." Basically, the skills demanded of everyday workers tend to get wider and wider every day. There is no one single job description anymore. As the article states: "Frontline workers must learn to command factory robots; administrative assistants are called on to weave seamless PowerPoint presentations from the boss's scrawled notes; pocket-protected geeks must communicate effectively with marketers and end users.
"With the demand for skills outstripping supply, it's no surprise so many US companies have trouble finding fully qualified job applicants. Some 57 percent of companies with 100 or more employees have had difficulty hiring workers with the required skills, according to the latest Heldrich Work Trends Study, published by Rutgers University in February 2002.
"But hasn't the economic downturn made hiring easier for employers? "I don't think the recession changed things that much," says Carl Van Horn, an author of the study and director of Rutgers' John J. Heldrich Center for Workforce Development. Long-term economic and demographic trends make the recession look like a mere blip on the 21st-century labor market's radar screen."
The case for post secondary, for-profit stocks is further reinforced by the fact that most employers do not want to provide the training themselves, but rather outsource it. This makes perfect business sense - as the variety of training that is required today is so broad - such that many companies would not have the capability (or the cost tolerant) to fulfill them.
This comes down to our pick for this week - Corinthian Colleges, Inc. According to the company's latest 10-Q, "As of September 30, 2004, Corinthian Colleges, Inc. (the "Company") operated 91 schools and colleges in the for profit, post-secondary education industry in the United States, and 45 colleges (including 10 colleges scheduled to close in fiscal 2005) and 15 training centers in 7 Canadian provinces. All of the Company's schools grant either degrees (associate, bachelor and master) or diplomas and offer educational opportunities from an extensive and diverse curricula library with an emphasis on four primary concentrations: allied health, business, technology, and criminal justice. Additionally, the Company has an online learning alternative available to students pursuing education exclusively online and is approved to offer 14 accredited degrees to exclusively online students."
Over the years, a significant amount of growth has come from acquisitions. For the fiscal year ended June 2004, the company acquired Career Choices, Inc. - bringing in ten campuses "in California, Washington, and Oregon, which offer diplomas and degrees in the applied science, automotive technology, HVAC technology and allied health fields." The company also acquired the one sole campus of East Coast Aero Tech, LLC "in Massachusetts - which mainly offers programs in the aviation maintenance technology field. According to the company, since the Company's formation in 1995, COCO has acquired 105 colleges and 15 training centers and has opened 28 branch campuses.
There are two main reasons why I chose to pick this stock. One piece of news that has been weighing down the company's stock is a SEC investigation into the company - an investigation which ended this Monday - officially ending the company's recent list or litigation woes (the private class action suits should also now disappear since they were related to either the SEC investigation or the Department of Education investigation which ended in September of last year). This removes an uncertainty in the stock. However, it now also allows company's management to focus on its core business while keeping them on their toes going forward. I doubt management will forget this lesson, and they will make sure that compliance is definitely the order of the day going forward (the original allegation stated that school officials at the Bryman College campus in San Jose, Calif., helped students falsify loan documents in order to obtain higher government grants).
Secondly, investors have also punished the stock for eroding margins. According to the latest 10-Q, net profit margin for the three months ending September 30, 2004 declined sequentially from 11.5% to 7.9%, mostly because of additional costs inherent in the integration of new (not as profitable) new campuses. Given that management has been successful in the past and given that all the legal woes are now gone, I expect the company will not be able to focus on its core business and successfully cut costs in the months ahead. As of now, I don't believe investors have taken this into account.
Its online based education system is also growing exponentially. As of the end of fiscal 2004, the number of online course registrations increased 54% to 43,046 from 27,273. This comes on top of an 82% increase in online course registrations during fiscal 2003. According to the company, "As of June 30, 2004, we offered 173 online courses through 27 campuses. All of the courses necessary to complete associate's and bachelor's degrees in legal assisting, business, accounting, and criminal justice are now available online. Additionally, we offer all the courses necessary to complete master's degrees in business administration and criminal justice entirely online. We offer 10 accredited degrees to students enrolled in exclusively online studies." COCO is also poised to take advantage of the education outsourcing trend in corporations through its acquisition of CDI and 15 training centers in Canada. A recent report by the National Postsecondary Education Cooperative discusses the recent growth in post secondary education (specifically, distance education) and the role that technology has played. It also highlights the fact that the government has gone out of their way to encourage more participation in postsecondary and distance learning courses (please see page 6 of the above report).
The company is projected to earn 89 cents per share during this fiscal year. Assuming a 20% growth rate for the next five years (and 5% thereafter), and using a conservative 11% discount rate, one gets a stock price valuation of $28.66, which reflects a 50% premium on the January 26th closing price. Technically speaking, the stock is also now poised to challenge its 40-week moving average on the upside. If breached, then this will be another bullish pillar for the stock going forward.
Henry To, CFA