COCO: Further Significant Business Model Changes Ahead

Analysts at Deutsche Bank reiterate their "hold" rating on Corinthian Colleges Inc COCO, while revising their estimates for the company. The target price for COCO has been reduced from $7 to $5. According to Deutsche Bank, “Low repayment rates and expected low average salaries, combined with high and rising CDRs, will make the next few years challenging for the company as they shift to a new more selective enrollment business model. Our belief is that COCO will still need to raise enrollment standards beyond eliminating ATB students.” “The potential loss of accreditation at the Everest College Phoenix campus (5% of students, 5.8% of revs), increasing 3yr cohort default rates (CDRs) to broadly above 30% in 2009, including the possible loss of Title IV eligibility at 3 locations (6-7% of revs), and inability of mgmt to gauge the effects of GE (Gainful employment) remain the key takeaways from FY 4Q10. This creates a period of significant uncertainty for Corinthian while they navigate these many issues,” the analysts mention. Deutsche Bank adds, “While eliminating ATB students should help COCO meet the proposed GE thresholds due to fewer drops, better placement and higher repayment rates, the move will cost COCO $120m in FY11 revs. Moreover, we believe COCO will have to make additional changes beyond ATB that will further reduce enrollment and revenue per student in order to comply with regulations. We estimate a 17% reduction to enrollment over the next 3 years and a drop in the EBITDA margin from 16.9% to 6.7% as the model transitions to a more selective enrollment model, and, eventually, a more cost-efficient structure.” Deutsche Bank has raised its EPS estimates for 2010 from $1.63 to $1.65, while lowering its EPS estimates for 2011 from $1.48 to $1.12. More Analyst Ratings here