Shares of Corinthian Colleges, Inc. (COCO) plunged more than 20% after it announced plans to put up 85 of its campuses for sale and eventually shut down operations at another 12.
The transition plan was part of an operating agreement reached with the U.S. Department of Education (DoE) on Jul 3 which limits the company’s use of federal student aid (Title IV funds) — the primary source of its revenues.
The Zacks Rank #5 (Strong Sell) company’s shares have tumbled more than 85% this year amid increased government scrutiny.
The Operating Agreement
Corinthian currently serves about 72,000 students and offers around 107 online and campus-based diploma and degree programs.
Per the operating agreement, DoE will govern Corinthian’s operations while the sale and teach-out of schools is in progress.
Corinthian has to look for buyers of its colleges in approximately six months. Also, the company will have to stop enrolling students at the 12 underperforming schools that will be eventually closed.
DoE will appoint an independent compliance and business Monitor to supervise the campus sales and teach-outs and report the same to the department. Though DoE agreed to provide $35 million for student aid funding to manage daily operations, the Monitor will keep an eye on fund disbursement.
The Santa-Anna, CA-based company assured that the transition plan will not disrupt the education of current students and cause minimal personal and financial losses to its staff and faculty.
The Memorandum of Understanding
The operating agreement implements a Memorandum of Understanding signed between Corinthian and DoE on Jun 22. DoE allowed Corinthian an immediate $16 million drawdown of Title IV funds to maintain uninterrupted daily operations. Also, Corinthian was put on DoE's Heightened Cash Monitoring 1 (HCM1) oversight on Jun 19, which includes a three-week delay in Title IV funds disbursement.
The funding freeze threw the company in a major cash crunch which resulted in the decision to sell or teach-out 97 schools to pull itself out of a possible shut-down.
What Led to the Tough Action?
Corinthian had allegedly falsified job placement rates and misplaced student attendance records at some of its schools which led to the strict action by DoE. The information submitted by Corinthian to defend itself failed to satisfy the DoE.
The DoE’s decision has shaken the future of the for-profit education sector as a whole. The sector has been struggling with intense competition and a difficult regulatory environment. The value proposition of a formal college degree is declining due to increasing tuition rates and overall difficult discretionary spending environment.
ITT Educational Company (ESI), based in Carmel, IN, is also facing strict enforcement of DoE rules and is witnessing poor enrollment trends which have led to the withdrawal of its guidance.
Other Stocks to Consider
Better-ranked education stocks worth considering include TAL Education Group (XRS) and DeVry Education Group Inc. (DV), both sporting a Zacks Rank #1 (Strong Buy).
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