Why Education Management's Shares Collapsed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of for-profit educator Education Management (Nasdaq: EDMC  ) were sent to detention by investors today, falling as much as 28% in intraday trading after the company reported its fiscal fourth quarter.

So what: A surprise $1.2 billion loss is a pretty good way to freak investors out. That loss was driven by a hefty $1.25 billion writedown on the value of its Art Institute chain of schools. While that's not a recurring cost that will impact future quarters, it does reflect the challenges that Education Management's schools have faced.

Looking ahead, the picture isn't much brighter as the company forecast a $0.08-per-share loss in the upcoming quarter as tough times persist. The expected red ink was a surprise to Wall Street as the consensus estimate called for a per-share profit of $0.05.

Now what: The company blamed the struggles on the difficult economy and job market and the reluctance of students to take on debt to finance their education. There's no doubt the regulatory pressure and bad press that for-profit schools have been walloped by in recent years played a part as well.

The bad news here is that it's unlikely that there will be a quick fix for the job market, and after the recent economic meltdown, potential students may continue to be wary about debt for some time to come. That said, these issues reflect the outside environment that the company is facing and not necessarily terrible execution on its part. For investors that are sticking around, it will be key to keep an eye on the steps management takes to address the industry and economic realities.

Want to keep up to date on Education Management? Add it to your watchlist.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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