Investors may have gone too far in halving the share price of Bridgepoint Education Inc, which has come under scrutiny for a high dropout rate and low spending on students.
The for-profit education provider is unlikely to lose federal funding, analysts say, given its size, and the backing of powerful shareholder Warburg Pincus that can force the company to take bold action to preserve its accreditation.
The company's flagship Ashford University, which has more than 84,000 mostly online students, is under review by its accreditor Higher Learning Commission (HLC).
The review comes after Ashford's application for accreditation to the Western Association of Schools and Colleges (WASC) was rejected, partly because of high student drop-out rates.
Fears it might lose its accreditation and thus federal funding, forcing it out of business, have pushed the stock to a lifetime low of $8.65. They had closed at $21.50 on July 6, before news of the WASC's rejection.
Ashford wants to switch its accreditation to the WASC because its base in California falls outside the HLC's region.
Denying Ashford accreditation, the WASC said the school had enrolled 240,000 new students in the past five years but nearly 128,000 had dropped out.
"Bridgepoint shares are trading as though investors believe that it is going to go out of business," said Trace Urdan, an analyst with Wells Fargo.
"I don't think that is a correct read on the situation."
Ashford has had a troubled history. It was a small school when it was bought out of near bankruptcy by Bridgepoint Education in 2005 with the help of Warburg Pincus.
It was also the focus of a Senate hearing last year over problems at for-profit universities, which are facing increasingly stringent accreditation reviews.
Analyst Jarrel Price of investment research firm Height Analytics said even though accreditors are under pressure to be tougher on for-profit schools, withdrawing Ashford's accreditation would be unprecedented.
"All for-profits are being held to a higher standard, whether that is going to cause problems for any of the schools remains to be seen," Price said.
Accreditors are more interested in improvement than compliance as they were concerned about the interests of students, said Wells Fargo's Urdan. Students would be in trouble if Ashford were to go out of business, he added.
Analysts say private equity firm Warburg Pincus, which holds almost two-thirds of Bridgepoint and provides its chairman Patrick Hackett, won't let the company go under.
"What is encouraging about Warburg's concentrated ownership is that if bold action is required, you have a board which has the ability to take bold action," said Urdan.
"This is not a board that is controlled by management."
Even though the loss of accreditation seems unlikely, more volatility is likely for Bridgepoint's shares, as it awaits the outcome from the HLC review and an appeal to the WASC for accreditation.
It might also face investor lawsuits as it was slow to report the concerns raised by the WASC.
"We are currently reviewing the stock and we are not buying any more. We are just going to hold on and see what comes up here," said Brian Culpepper at James Investment Research Inc.
Culpepper, who owns a near 1 percent stake in Bridgepoint, expects the company to cut its 2012 outlook.
The HLC could force changes to Bridgepoint's admission policies, putting enrollment under pressure and thus earnings.
(Reporting by Megha Mandavia in Bangalore; Editing by Sreejiraj Eluvangal)