School's back in session, and the teachers are back . on Wall Street. In tomorrow's news, we'll hear from Corinthian Colleges (NASDAQ:COCO) on its fiscal first-quarter 2007 performance.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts follow Corinthian, scoring the for-profit educator two buys, 11 holds, and three sells.
  • Revenues. On average, they expect to see revenues decline 2% to $231 million.
  • Earnings. Worse, profits are predicted to fall 62% to $0.03 per share.

What management says:
The big news was bad news at Corinthian this quarter. The firm, enmeshed like so many others in the ongoing and wide-ranging stock options backdating scandal, remains unable to file its 10-K with the SEC until it's got a firm grasp on the accounting implications of how it issued past stock options to its execs. As a result, in October, it was warned (again, like so many others) that its stock is now subject to delisting by the Nasdaq.

Last (fiscal) year's news wasn't much better. Revenues were essentially flat versus fiscal 2005, operating profits down by a third, and profits per diluted share down 25%. Although CEO Jack Massimino put a brave face on the situation, characterizing it as "building the . infrastructure required for sustainable growth," the fact remains that the growth itself didn't enroll at Corinthian last year.

What management does:
Over the last six months, Corinthian's revenues have continued to slip, down 1% versus last year. The good news here is that cost of sales fell 1% as well; the bad news is that operating expenses continued to climb, rising 8%. As a result, although rolling gross margins have been more or less stable for the past year, operating margins continue to slide. (Rolling net margins inched back up last quarter, granted, but mainly because the fourth quarter's restructuring charges were a bit less damaging than the previous two quarters' had been.)

Margins %

3/05

6/05

9/05

12/05

3/05

6/05

Gross

45.2

44.4

43.7

43.3

42.9

43.2

Op.

12.8

11.7

10.3

9.0

7.5

6.8

Net

7.5

6.1

5.2

4.3

3.6

4.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
As bad as all the above looks -- and as much as the stock might continue to suffer as it wades its way through the legal morass of the backdating scandal -- there remains one bright silver lining at Corinthian: free cash flow.

Last fiscal year, Corinthian generated a healthy $61.5 million in free cash flow, as weaker operating cash flow was offset by a slowdown in capital spending to yield 20% better cash profits than the firm generated in fiscal 2005. Weighed against the firm's billion-dollar market cap, that gives Corinthian a relatively benign price-to-free cash flow ratio of 16.6, which is much cheaper than the firm's 25.6 P/E ratio might make it appear. Although I understand the concern voiced by my Foolish colleague Ryan Fuhrmann over the stock options scandal, I'm of the opinion that it's more a tempest in a teapot than a true threat to Corinthian's business model.

Options abuses can be cured by stripping the offenders of their ill-gotten gains and their management posts. What's left once that's done will remain a cash-printing machine of a business, cheap, fast-growing, and rewarding to shareholders in the long run. There, I've said it. And I've put my reputation where my mouth is, rating Corinthian's stock an "outperform" in Motley Fool CAPS. Disagree with me? Say it in CAPS, and may the most prescient Fool "win."

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Fool contributorRich Smithdoes not own shares of any company named above. The Fool's disclosure policy always does its homework.