This Education Company Has Been Badly Hit

Neha Chamaria, The Motley Fool
Updated

For-profit colleges are getting hit from both sides, with students skipping them and investors turning up their noses.

Like other industry players, lower student enrollments hit Corinthian Colleges (NAS: COCO) hard in its fourth quarter. The company's net income dwindled by a staggering 90% from last year. What should you make of the company's prospects now?

The numbers
Higher tuition couldn't prevent Corinthian's top line from slipping by nearly 12%, to $425.2 million. New student enrollments dropped a significant 27.3% as the college tightened its enrollment criteria following more stringent government regulations.

Corinthian's operating margin took a big hit, slumping from 11.6% to 1.6% year-on-year. While lower revenues were the primary factor, the company also recorded a one-time impairment and severance charge of $11.7 million in the quarter.

The most striking fall was in the company's bottom line, which slid to $3.4 million -- hardly 10% of last year's figure. For the trailing 12 months, Corinthian's return on equity is now at a not-so-impressive -17.5%, as compared to 24.1% last year.

Changing industry dynamics
Increasing student loan defaults prompted the government to step up regulation, which in turn continues to hit enrollments industrywide. Apollo Group (NAS: APOL) reported a 40.5% fall in new degree enrollments, while new student enrollments fell 21% in the second quarter for Strayer Education (NAS: STRA) , which has a high student default rate. DeVry (NYS: DV) also saw its new undergraduate enrollments slip by 25.6% in its latest quarter.

But these education companies recently got a breather when the Department of Education released new rules that were less harsh than those in the draft version. In the earlier version, for-profit education companies failing to meet certain loan payment and default-related metrics could have lost federal funding in 2012 or 2013. The time frame has now been extended until 2015. These companies have more time to get things in order, and they are planning accordingly.

Corinthian's plans
Corinthian has been devising ways to offset the adverse impact of lower enrollments on its revenues and margins. It is taking initiatives such as expanding program offerings, boosting its online presence, and opening more schools. The company opened six schools in this fiscal year. Its total capital expenditure for the year 2011 rose to $110.7 million from $83.5 million last year.

Corinthian has also reinstated its practice of admitting students having no high school diploma on the basis of an "ability to benefit" test.

Following the DOE's June release of the final gainful employment rules, which largely pertain to student loan payments, Corinthian now also plans to modify its two-year programs' curricula and pricing to attract students.

The Foolish bottom line
With the daunting task of meeting stricter regulations coupled with expected weak enrollments, it may not be the right time to get excited about Corinthian.

But with the regulatory spotlight on these companies, you may like to remain updated on what's going on. Click here to add Corinthian Colleges to your watchlist, or add these other companies:

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published