For-Profit Colleges Have Little Blood Left to Give

As if for-profit colleges like ITT Educational Services (ESI), Corinthian Colleges (COCO), and Apollo Education Group (APOL) weren’t struggling enough already, the latest round of woes for ESI stock may have dealt the industry a death blow.

As it turns out, the potential buyer for 24 properties owned by ITT Tech (which it was going to lease back to the school) backed out of the deal. Now without that cash infusion it was expecting, ITT Educational Services may be too far buried in fiscal quicksand to ever dig its way out.

Of course, investors who have been following the saga of ESI stock and its peers know this chapter pretty much played out as expected. More than that, it’s becoming clear that this is just one of the final chapters in a story that’s going to end tragically.

ITT Educational Services is Getting Desperate

for-profit collegesIn the interest of playing catch-up for anyone who gave up on the for-profit colleges long ago, ESI stock (like many other for-profit school stocks) has been struggling since 2010.

That’s when the Department of Education recognized the for-profit education industry was spewing out a disproportional number of graduates who weren’t getting jobs, and therefore were defaulting on their government-supplied student loans.

The eventual solution — and bear in mind this is the highly simplified explanation — was cutting off these schools’ lifeblood … student loans; the weak graduation rates and questionable “recruitment” tactics for these institutions made for eye-opening headlines without any further help from the DOE.

The end result? For-profit colleges began to unravel. Their very existence in their present form is being called into question, with most of them seeing declining revenue since 2010. Some of them, including ITT Educational Services, finally swung to a loss in the last quarter of 2013, and there’s no end in sight to the trend of weaker revenue and net losses for many of these institutions.

To buy some time and beef up its liquidity, ITT Educational Services announced in May that it would seek to sell a couple dozen of its properties to the tune of $119 million. The buyer wanted more time to mull the deal, but ITT couldn’t afford to wait, as doing so could limit sale negotiations with other potential buyers. Ergo, as of right now there is no buyer at the table, and no clear future for ITT Tech.

In the same SEC filing that let investors know the buyer was no longer interested, however, ITT Educational Services also explained that the for-profit school still runs the risk of being declared “not financially responsible” by the DOE, by virtue of the school’s failure to refile its recent quarterly reports.

The company’s creditors have temporarily upped its credit facility to survive a potential demand from the Department of Education that has the potential to disqualify the school from receiving any federally-funded loan money. Problem: The core causes of ITT Educational Services’ financial woes still haven’t been resolved. That is, enrollment is slumping, and losses are growing.

If the story seems vaguely familiar, it may be because Corinthian Colleges recently announced a sale of much its real estate, too — simply in order to survive a while longer. Specifically, Corinthian agreed to sell 85 of its 107 campuses right away, and then sell twelve more of its properties after students at those twelve campuses complete their programs.

The ultimate driver of the sweeping decision was pressure from the Department of Education, which had expressed a variety of concerns regarding Corinthian Colleges since 2012. It matters because government-sponsored student loans account for 80% of Corinthian’s revenue.

To be fair, two companies within an industry don’t always speak for the entire industry. In the case of for-profit schools, however, setbacks for one or two of the more prolific players in this particular space have generally been omens of what’s to come for most of them. With Corinthian and ITT Educational Services both willing to shed profit centers just to survive, odds are good other for-profit schools are under a similar financial duress.

For-Profit Colleges Are on Their Death Beds

The sale of real estate assets (or lack thereof) is just another entry in a long list of problems most of the industry’s players are dealing with, each one being more alarming than the previous. Indeed, each new red flag seems to have been caused by the previous stumbling block. At their current rate though — unless something suddenly changes for the better — for-profit colleges will be beyond salvaging. Indeed, we may be past the point of no return already.

While it had always been a threat the DOE dangled over the heads of for-profit colleges, frozen funding only became a reality in recent weeks when the government agency didn’t release federal student loan money to Corinthian Colleges. It was willing to release the money, provided the school produce the job placement statistics the Department of Education has asked for weeks earlier. When Corinthian failed to provide the requested documentation, though, the DOE imposed a 21-day hold before student loan money could be accessed.

The school, apparently unwilling to provide the simple data and/or unable to wait for funding, opted to close its doors and liquidate most of its campuses. It’s a decision that looks more than a little suspicious.

Bottom line? It may be too generous to call this the beginning of the end of for-profit colleges as we know them. It’s closer to the middle of the end. Yes, there are exceptions to the generalization. As a whole, however, the woes COCO stock and now ESI stock are experiencing are just a microcosm of an industry-wide hurdle.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/for-profit-colleges-esi-coco/.

©2022 InvestorPlace Media, LLC