), which we view as one of the leading growth stories in the sector. The stock carries our highest investment recommendation of 5 STARS, or buy.
We see Corinthian's sales and profit growth remaining strong in coming years, fueled by ongoing robust demand in the sector, continued acquisitions and campus openings, additional enrollments at existing schools, and modest tuition increases. We like Corinthian's business model and also find its balance sheet to be in good shape. And we think the shares are undervalued, based on two key metrics.
NORTHERN EXPANSION. Since its inception in 1995, Corinthian has quickly established itself as one of the nation's largest for-profit higher-education concerns. As of March, 2004, it operated a total of 86 campuses and two continuing-education centers in 21 states, plus 46 campuses and 15 corporate training centers in Canada. It also offered online learning at 25 of its schools at the close of fiscal 2003 (ended June 30).
Its greatest campus concentration in the U.S. is in California, with 20 units as of March, 2004, and Florida, with 14. All but one of its campuses in Canada were acquired through the August, 2003, takeover of CDI Education.
Corinthian offers a variety of associate's, bachelor's, and master's degree programs. It also offers diploma programs where students get training in a given field but don't pursue a degree. It provides the greatest course concentration for careers in health care, business, criminal justice, and technology. At the end of fiscal 2003, 39% of Corinthian's students were enrolled in associate's programs, 6% in bachelor's, 2% in master's, and 53% in diploma programs.
RISING ENROLLMENT. The institution's initial rapid growth came through an aggressive acquisition program, where it concentrated on obtaining established for-profit education campuses. From the time of its IPO in early 1999, it also began to focus on opening new campuses. Through March, 2004, Corinthian has opened a total of 24 new campuses and has added 75 campuses, 15 corporate training centers, and 2 continuing-education centers through acquisitions.
At December 31, 2003, its total student population was 59,502, up 49% from a year earlier, with growth coming from acquisitions, new school openings, and, most important, much higher enrollements at existing campuses. Corinthian recorded 17% growth in students in that period on a same-school basis. We think the same-school student growth can be chalked up to an expansion and enhancement of its curriculum, the employment of an integrated marketing program, the relocation of schools to larger facilities, and the expansion or remodeling of existing facilities.
Corinthian's prospects for its strong levels of growth to persist are quite positive. We believe that the combination of rising worker ambition and the need for greater knowledge to maintain workforce positions has led many more adults to become aware of programs offered by for-profit educators such as Corinthian.
NOT TOO PRICEY. Because many working adults attend its programs, Corinthian's strategy is to make its offerings attractive through a flexible class schedule. Classes are held throughout the day, as well as nights and weekends. It also operates schools year-round, so students can complete their study more quickly. We expect the scheduling model to keep Corinthian's schools attractive.
A favorable cost comparison with private nonprofit institutions is another factor that we believe makes Corinthian's educational programs appealing. An undergraduate-degree candidate at one of Corinthian's schools, which operate under names such as Florida Metropolitan University, Parks College, and Everest College, was paying average tuition of about $7,800 per academic year as of the end of fiscal 2003. This compared with average tuition costs of $19,710 at four-year private nonprofit colleges in the 2003-04 school year. On the downside, Corinthian's costs were higher than the $4,694 average at public four-year colleges at that time.
One additional factor that should make Corinthian's offerings appealing is its focus on attractive markets. Its programs stress health care, business, and information technology -- areas where it believes prospects will likely remain strong in coming years. Further, Corinthian places its campuses in geographic regions with favorable population trends.HEALTHY PROFITS. In fiscal 2003, Corinthian derived about 82% of revenues under student financial-aid programs, which mostly fall under the Title IV heading. Due to excessive rates of student defaults under program guidelines in the early- to mid-1990s, seven of Corinthian's schools lost their eligibility to participate in some of the Title IV loan programs. However, these excessive rates already existed when Corinthian acquired the institutions. Through aggressive default-management efforts, all seven of the campuses were participating again in the Title IV program by October, 2000.
Based on our positive opinions of both the prospects for the for-profit education industry and Corinthian's business model, we expect the outfit to record strong revenue and profit growth for the next several years. Our present forecast calls for Corinthian's revenues to climb over 55% in fiscal 2004. This will likely reflect the inclusion of CDI Education (which had revenues of $130 million Canadian -- about $98 million U.S.-- in 2002), two other recent takeovers, new campus openings (a total of 10 are planned for fiscal 2004, 6 of which have already opened), greater enrollments at existing schools, the expansion of campuses, expanded online offerings, and tuition hikes.
However, we see somewhat narrower operating margins in fiscal 2004, as we expect higher proportional costs from Corinthian's large group of acquired schools as it transforms them to its business model. We see that factor outweighing the advantage of costs spread over an expanded campus base, and lower bad-debt expense that we forecast.
SOLID BALANCE SHEET. We expect earnings to rise 40%, to $2 a share in fiscal 2004, from the $1.43 earned in fiscal 2003. Based on our forecast of a 23% climb in revenues in fiscal 2005 and slightly wider margins related to the further integration of new schools, we also see earnings expanding 28%, to $2.55 in fiscal 2005.
Our Standard & Poor's Core Earnings estimates are $1.79 a share for fiscal 2004 and $2.32 for fiscal 2005, 11% and 9%, respectively, below our operating forecasts for these years. The difference reflects our projection of stock-option expense.
Corinthian's balance sheet is solid. Long-term debt represented only 16.7% of total capital as of December 31, 2003. In addition, it has maintained a return on equity (ROE) in excess of 30% in its past two fiscal years, with the figure reaching 34.2% in fiscal 2003 (ending June).
SPACE TO RUN. The outfit recently traded at an above-market (as defined by the S&P MidCap 400) price-earnings multiple of 26 times our calendar 2004 forecast of $2.27 a share. However, at a p-e-to-growth (PEG) ratio of only 1 times the 25% or greater EPS gains we see for the next few years, it trades at a discount to the S&P, which had a PEG ratio of 1.8 based on our 10% growth forecast. We think Corinthian's likely strong EPS growth warrants a PEG multiple at least near that of the S&P MidCap 400. Attaching a 5% discount to Corinthian's PEG ratio suggests potential stock gains to $97, over the next 12 months.
discounted cash-flow (DCF) analysis, we calculate its appreciation potential over 12 months to be $81, vs. its $59 price now. By blending our PEG and DCF methodologies, we arrive at our 12-month target price of $88.
Risks to our earnings forecasts and target price include the loss of access to federal student loans and grants for Corinthian's students (because of excess student default rates on the loans or an institution's receipt of more than 90% of its revenues from the programs in one year), and regulatory agencies or third parties initiating an investigation, claims, or litigation.
Other risks include the failure to effectively identify, acquire, and integrate additional schools, effectively open new schools, or add new services, not obtaining additional capital in the future, and competitive pressures in the post-secondary market. Analyst Jaffe follows stocks of for-profit education companies for Standard & Poor's Equity Research