Discounted Education

For-profit education stocks are being discounted on Wall Street today. This is not Wal-Mart (NYSE: WMT  ) , with its everyday low prices. Remember, the financial district is the periodic home of bubble pricing. This is more like Kmart (NYSE: KMRT  ) -- a blue light special.

Leading the blue light specials (or, for those addicted to food, the blue plate specials) is the Nasdaq's biggest volume and percentage loser -- Corinthian Colleges (Nasdaq: COCO  ) . The stock declined 45% even though the company reported a 49.9% increase in the "student population" for the fourth quarter.

Same-school starts (the equivalent to retail's same-store sales) increased 12.3% -- but that is below the year's 16.6% growth, and, although excellent, is below company expectations. Even worse, earnings will not meet expectations because of higher attrition, later-than-anticipated new branch campus openings, and the fallout from negative publicity related to student litigation in Florida.

Students researching recent headlines will notice the usual warning sign that something is wrong. There is a long list of law firms suing the company for allegedly failing to disclose and/or misrepresenting everything from fraudulently obtaining funds from the federal government to reporting inflated generally accepted accounting principles income to not having adequate internal controls. Is this a Harvard Business School case study in the making?

Analysts had expected Corinthian to earn $0.28 for its recently completed fourth quarter and $0.97 a share for the fiscal year. The company is projecting fourth-quarter earnings of $0.19 to $0.20 a share and 2005 first-quarter earnings of $0.17 to $0.19 a share. The earnings trend is bad, but, with as much cash as debt, the company is hardly in a precarious position.

All the bad news at Corinthian is causing Wall Street to discount other education stocks. In early trading, Career Education (Nasdaq: CECO  ) was down 15.7%, and Apollo Group (Nasdaq: APOL  ) was down 14.7%. Because both are cash-rich and growing, today's sales prices appear to be buying opportunities.

Also falling is debt-free (and cash-rich) ITT Educational Services (NYSE: ESI  ) , which, based on 2005 earnings estimates, is trading for 14 times earnings. For comparison, highly leveraged and earnings-growth challenged DeVry (NYSE: DV  ) , although down 12%, is still selling at 20 times 2005 earnings.

The lesson today is that, although education stocks have been discounted, due diligence is still required to find the best investment.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.