Studies in contrast (pun intended) don't get much clearer than this. Yesterday morning, I looked out my window and saw a suburban street lined with the minivans of parents ferrying their 5-year-olds to orientation at the local elementary school. A new school year was beginning. A fresh batch of eager young minds was beginning an odyssey of many years that will in many cases culminate in a baccalaureate.
Meanwhile, for-profit educator Corinthian Colleges
Yes, folks, Corinthian has officially graduated from "rocket stock" to "large, sustainable growth company." It's entered the real world -- one in which investors will perhaps be less eager to accord it the nosebleed P/Es of yesteryear, in anticipation of Corinthian's achieving the weight and market heft of an Apollo Group
Witness: In fiscal 2005, which just ended for the educator, Corinthian posted 21% sales growth. Nice, but not rocket-stock caliber. Moreover, in an effort to keep that growth coming, Corinthian incurred sizeable hits to its operating and net margins. It spent 27% more on educational services (including, for example, salary costs) in fiscal 2005 than in fiscal 2004. It also spent 28% more on marketing and 34% more on "general and administrative" expenses. And it did all of this to achieve just 21% revenue growth.
As a result, operating margins dropped like a rock, plunging 610 basis points from the 15.9% achieved last fiscal year to hit just 9.8% this year. Net margins followed suit, falling 340 basis points from 9.5% to 6.1%. Despite seeing its diluted share count decline since this time last year, Corinthian earned just $0.63 per diluted share for its owners, a 22% year-on-year decline.
Worse, those profit numbers are only what Corinthian earned under the generally accepted accounting principles. The company's true cash profitability, as measured by free cash flow, was significantly less -- just $51.3 million, versus $58.4 million in GAAP net profits. At its current market cap of $1.16 billion, that gives the company a price-to-free cash flow ratio of 22.6 -- higher than its projected long-term earnings growth of 17.8%, and higher even than the pace of this year's margin-compressing revenue growth.
In other words, as cheap as Corinthian's current P/E of 15 might seem, this stock may still have farther to fall.
For related Foolishness, see "Has Career Education Learned Its Lesson?"
Fool contributor Rich Smith owns no shares in either company named above.