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Last Friday, shares of Corinthian Colleges (NASDAQ: COCOQ ) sank 4% to a new 52-week low of $1.68. This represents a 43.4% decrease from the company's 52-week high of $2.97 and signals that tougher times may await the company and its shareholders. However, amid this decline, is it possible that some money is left on the table for the Foolish investor to swipe away before somebody else does?
Fundamentals are mixed
In the for-profit education sector, Corinthian has been one of the most resilient companies in regards to protecting its revenue stream amid increased regulation. Out of concern that for-profit colleges are consuming too many taxpayer dollars and taking advantage of underprivileged individuals by charging too much for the quality of education they receive, the federal government has imposed specific regulations against them.
As a result of these regulations, enrollment rates have declined and revenue has dropped precipitously. This is best demonstrated in the following graph:
The graph above, which uses $1,000 as a base measure for each institution, illustrates the revenue growth of Apollo Education Group (NASDAQ: APOL ) , ITT Educational Services (NYSE: ESI ) , Career Education (NASDAQ: CECO ) , and Corinthian, four leading for-profit colleges. As we can see, revenue for these schools has been experiencing a general decline since 2010, but Corinthian has, undoubtedly, performed the best.
Even as ITT and Career Education continued to fall through 2012 (no complete 2013 fiscal year data is available yet), and as Apollo has seen its decline continue into 2013, Corinthian experienced a modest downturn. This was followed by a slight uptick in revenue in 2013, despite difficult times for the industry.
Based on this metric alone, investors might assume that Corinthian is the most attractive investment prospect of the four. However, the company's attractive top line resistance has come at the cost of its profitability.
As we can see, Corinthian performed quite well compared to its peers until 2011, when its revenue began declining. Around this time, slightly lower revenue, combined with higher costs and, in 2011, a $220.1 million impairment slammed the company's earnings. While removing the effects of the impairment would make the decline in earnings less drastic, the results are still terrible and lag both Apollo and ITT.
But wait! There's more!
Putting profitability aside, there are other factors that investors need to take into consideration before rendering an investment decision. The most important is to ensure that management is abiding by the law at all times. No matter how profitable a company is, it doesn't mean anything if rampant fraud is taking place.
This is the question that came into investor's minds on Friday and the very concern that sent the stock lower. After receiving a civil investigative demand (CID) from the Consumer Financial Protection Bureau (CFPB), Latham & Watkins LLP, the company's law firm, sent a petition to the Bureau requesting that its terms be set aside or modified.
The CID is evidence of an investigation by the CFPB into the company's marketing and origination of student loans to determine if it is engaging in any abusive practices. However, according to the request from Corinthian's law firm, the company believes that the scope of the information demanded would be overly burdensome to retrieve.
It is possible that management is trying to cover something up by making such a request, but it should not be automatically assumed that there is something illegal in the works. As the company points out on page 9 of the request, it currently has over 40 terabytes of data and is adding approximately 100 gigabytes per month. This is a significant amount of data and, when spread across more than 15,000 employees and 80,000 students, could require a great deal of cost and effort to get everything that investigators want to see.
Although Corinthian's revenue has been fairly resistant to changes in the regulatory environment these past few years, the company has paid for it with bottom line impairment. On top of this, the company is one of at least two in its industry (the other being ITT) that is being investigated by the government for potential fraud. This alone isn't the end of the world, but investors perceived its request for more relaxed requirements during the investigation to be telling of what may be taking place.
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