Corinthian Colleges Gains on Upgrade

(Corinthian Colleges upgrade report updated with additional commentary.)

SANTA ANA, Calif. ( TheStreet) -- Corinthian Colleges ( COCO) shares spiked on Friday following some favorable broker action, leading other education stocks higher as well.

RBC Capital Markets analyst Robert C. Wetenhall upgraded Corinthian Colleges shares to outperform, from underperform, lifting his price target by a dollar to $6.


Wetenhall called the Everest Colleges parent "speculative but worth the risk" based on recent management changes, and said "excessively low investor expectations" will lead Corinthian to outperform.

Corinthian shares surged 7.2% to close at $5.06, off earlier double-digit percentage gains. More than 13 million shares were in play compared with their average daily trading volume of 5.7 million.

Wetenhall noted that his upgrade was based on a meeting with Corinthian's new CEO, Jack Massimino, earlier this week.

"In our opinion, the return of Mr. Massimino, who was previously COCO's chairman and its CEO before that, will be viewed a year from now as an important step in terms of getting the company back on track. We expect that Mr. Massimino will leverage his experience in running public companies in the health care and for-profit education sectors to develop a rehabilitation plan for COCO that stabilizes enrollment and addresses its perilous regulatory position. We also note that we believe investor expectations for the company are excessively pessimistic. Although an investment in COCO is speculative, we believe that the risk/reward pendulum has swung in a favorable direction."

On Nov. 30 Corinthian's then-CEO Peter Waller resigned after less than two years on the job. He resigned from both the CEO post and as a member of its board of directors.

The board then tapped chairman Massimino, who had served as chief executive from Nov. 2004 through July 2009, to resume the role of CEO. Massimino also continued to serve as chairman, Corinthian said at the time.


Waller's resignation marked the second top executive departure for Corinthian in a short time span. In October Corinthian announced the resignation of another top executive, then president and COO Matt Ouimet. Ouimet's resignation became effective at the end of October. He had held his position since Jan. 2009, and said he was leaving to pursue other opportunities.

Corinthian said at the time it had no immediate plans to fill Ouimet's post, and made no mention of it its fiscal 2011 first-quarter financial results, released in early November.

Wetenhall concluded that "We think it makes sense to get in early before COCO articulates and implements a new game plan. Mr. Massimino is an experienced operator with the wherewithal to successfully adapt the business model to the current environment, in our view."

Not all COCO analysts share Wetenhall's bullish view.

On Monday, Barclays Capital analysts downgraded Corinthian shares to underweight from equal weight, lowering its price target by a dollar to $3.

Indeed, Wetenhall outlined several investment risks surrounding Corinthian.

He cautioned that enrollment could decline on counter-cyclical headwinds and adverse publicity. In other words, college enrollment tends to increase when unemployment is high. As the labor market improves, albeit slowly, the situation could reverse and adversely affect for-profit schools.


The analyst cautioned that operating margins could contract as a result of negative sales leverage and rising student acquisition costs. He also noted that revised gainful employment regulations could curb Corithian's enrollment and profitability.

Stocks in the for-profit education sector had a rough 2010. Regulatory uncertainty weighed on the sector, criticism about colleges' graduation rates and student loan repayment rates abounded, future enrollment figures were called into question, schools were accused of failing to adequately prepare students for profitable careers yet leave them saddled with heavy debt and federally proposed restrictions on the industry's business operations cast a shadow no bull market could fully offset.

Wetenhall's research in early December showed that $1 invested in the for-profit education sector at the start of 2010 would be worth just 73 cents. By contrast, the same dollar would have been worth $1.06 had it been invested in the S&P 500.

>>School Stocks Slammed By Report

The Obama administration's proposed regulations covered everything from restricting incentive-based recruiting practices, the need for new job-training courses and taking action against schools which fail to advertise honestly to requiring schools to notify students of graduation and job placement rates. Institutions would also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools would also have to comply with what is called the 90:10 rule in fiscal 2012, a rule stipulation that no more than 90% of a for-profit education provider's revenue may be generated from Department of Education's federal student aid program.

Arguably the most controversial of the proposed regulations, known as the "gainful employment" rule, expected to be issued soon, would cut federal aid to schools where less than 45% of students are able to repay their loans.

Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

A final version of the gainful employment rule is expected to consist of a two-part measurement to determine a program's eligibility to receive federal student aid, based on loan repayment rates and debt-to-income ratios, and requiring a minimum of four years of repayment history and three years of employment history.


The Institute for College Access and Success, a student-advocacy group, said in August that its research showed nearly two-thirds of for-profit colleges' students were not repaying their loans.

Education peer Apollo Group ( APOL), parent company of University of Phoenix, beat quarterly earnings expectations on Monday despite a 2% decline in year-over-year results.

Revenue came in at $1.33 billion, up 5.4% from year-earlier results, driven largely by tuition price increases at University of Phoenix.

Citi analyst James Samford noted that Apollo, along with DeVry ( DV) and Corinthian Colleges, offers relatively high tuition rates, presenting a competitive disadvantage to lower-priced peers like American Public Education ( APEI) and Bridgepoint Education ( BPI) when schools will be facing regulatory hurdles.

School stocks traded sharply lower earlier this week after Strayer Education said late Friday that new student enrollments across its campus and online education system decreased by 20% for the 2011 winter term, which began Jan. 3, even as continuing student enrollments increased by 10%.

A roster of education providers -- include DeVry , Capella Education ( CPLA), ITT Educational Services ( ESI), Apollo Group and Corinthian have also warned in recent months of declining student enrollment , in anticipation of the new, more restrictive regulations.

Apollo shares closed 0.2% lower Friday at $42.31. DeVry gained 0.4%, American Public 1.3% and Capella 3.6%, Strayer 0.4%, Bridgepoint 1.3% and ITT Educational 2%.


-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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