Corinthian Cools Off

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You must admit it seems a bit ironic. Just as the new school year starts nationwide, for-profit educators such as DeVry (NYSE: DV) are starting to announce slowdowns in their earnings growth. Last week, the latest for-profit educator to make such an announcement was Corinthian Colleges (Nasdaq: COCO). While revenue growth is still astounding -- up 56% for both the fiscal fourth quarter (over fourth-quarter 2003) and for fiscal 2004 (over full-year 2003) -- the profits story is a bit different.

For the year, Corinthian's profits have risen less than half as quickly as revenues have. And the fourth-quarter results were even worse: Year-on-year profit growth was relatively stagnant despite the continued huge rise in revenues -- up just 6% against 56% revenue growth.

Yet one week ago, Corinthian shares could be had for $11.50. Today, in the wake of Corinthian's earnings release, those same shares will cost you $15. So an investor might ask why Corinthian's shares jumped 30% in value over the past week. There are two answers.

First, Corinthian had already taken a pretty big hit to its stock price last month after it preannounced results that undershot analysts' expectations for the company. Some investors have been murmuring that the company was "oversold." Second, we already expected underwhelming results from Corinthian. For Corinthian, 2004 was a consolidation year. It acquired 72 colleges and training centers, opened 10 branch campuses, and upgraded or relocated 35 more campuses while adding nearly 150 new courses to offer to its students.

While Corinthian itself has been a fairly well-run operation, its new acquisitions were less so, and it is going to take some time to turn them around. Their incorporation into Corinthian's results increased the costs as a percentage of sales of its educational services, payroll, rent, and classroom and bookstore costs. Additionally, bad debt expenses as a percentage of sales increased from 3.4% to 4.2%. This relative increase in costs took a huge toll on Corinthian's consolidated operating margins, dropping its fourth-quarter operating margin from 21.1% a year ago to 13.8% in fiscal fourth-quarter 2004.

The good news for Corinthian's investors is that the company now has a chance to turn its acquisitions around. As it does so, even without increasing revenues (or while increasing revenues at a slower rate), its earnings growth may begin to outpace revenue growth next year.

One quarter's results can never give you the full story on a company. To learn more about Corinthian's past performance, read:

• Rich Smith's review of Corinthian's third-quarter results.
• Jeff Hwang's review of the company from last year.
• A truly historical gem by Rick Munarriz from back in 2000.
• And Rich Duprey's contrarian (and perhaps prescient) take on this industry's legal woes.

Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.