ITT Educational Services – (De)Greed is good!
October 26th, 2009
While the recession has hurt most companies across the USA, ITT Educational Services has actually benefitted. Enrollment trends have been strengthening as unemployed workers have signed on to upgrade skills and other students continue on towards advanced degrees to become more employable in the future.
ITT Educational Services, Inc. is a leading provider of technology-oriented postsecondary degree programs. ESI operates more than 105 Technical Institutes in 37 states, which predominantly provide career-focused degree programs of study in fields involving technology to approximately 65,000 students. ESI has been actively involved in the higher education community in the United States since 1969. Shares are traded on the New York Stock Exchange under the symbol “ESI.”
October 26, 2009 - $99.15
52-week range: $65.31 - $133.75
Since their IPO in June 1968 at a split-adjusted $2.50 /share ESI has done little to disappoint its investors. Year after year they have posted higher sales and earnings with the stock price reflecting the great numbers.
Here are ESI’s per share numbers from continuing operations as reported by Value Line:
|
Year
|
Sales
|
C/F
|
EPS
|
Avg. P/E
|
Y.E. Close
|
|
1999
|
6.43
|
0.72
|
0.48
|
25.9x
|
$7.72
|
|
2000
|
7.40
|
0.89
|
0.57
|
16.1x
|
$11.00
|
|
2001
|
8.86
|
1.13
|
0.72
|
24.1x
|
$18.43
|
|
2002
|
10.31
|
1.44
|
0.94
|
22.4x
|
$23.55
|
|
2003
|
11.51
|
1.76
|
1.27
|
28.6x
|
$46.97
|
|
2004
|
13.43
|
2.37
|
1.94
|
20.8x
|
$47.55
|
|
2005
|
15.06
|
2.81
|
2.34
|
21.6x
|
$59.11
|
|
2006
|
18.46
|
3.42
|
2.72
|
23.9x
|
$66.37
|
|
2007
|
21.91
|
4.40
|
3.71
|
27.4x
|
$85.27
|
|
2008
|
26.22
|
5.82
|
5.17
|
14.8x
|
$94.98
|
|
2009*
|
35.25
|
8.50
|
7.80
|
15.0x
|
N/A
|
* 2009 figures include VL estimates for Q4
With consensus views for EPS of about $7.75 this year and $9.10 or better for 2010 the current multiple is about 12.8x and the forward P/E is just 10.9x. Those are exceedingly low for this consistent growth company. Compare those with the normalized P/Es of the previous 10 years to see just how cheap these shares are right now.
ESI’s balance sheet looks great with no short-term debt and just $150 million in total debt versus treasury cash of about $300 million. Value Linegives ESI a ‘B++’ for financial strength while noting 95th percentile scores for both ‘earnings predictability’ and ‘share price growth persistence’ (with 100thbeing best). ITT Educational Services shares have outperformed 19 of 20 companies in the Value Line universe over the long haul.
Standard & Poors sees ‘fair value’ as $125.60 while Morningstar is even more bullish with a (recently raised) $139 ‘fair value’ estimate and a 4-star ranking (out of 5).
About the only negative is the lack of a dividend. The company seems to have done pretty well with the cash though. Shares outstanding have been pared from 49.23 million at YE 1999 to 37.76 million as of Sep. 30th. EPS have grown from $0.48 to $7.07 in that same (less than 10 year) period. Shareholders have seen over 1100% gains [NOT a misprint] during the past decade.
With macro-economic tailwinds and nothing but great results this seems like an opportune time to pick up some ESI while the valuation is historically low.
A return to even fifteen times next year’s $9.10 estimate would bring these shares to $136.50 or 37.6% above today’s close. Is that a stretch? Hardly. ESI touched $131.80 in 2007 on just $3.71 in full year earnings and they’ve been as high as $133.75 already in 2009.
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For the option savvy crowd…
Consider this buy/write combo for Jan. 21, 2011:
|
|
Cash Outlay
|
Cash Inflow
|
|
Buy 100 ESI @ $99.15 /share
|
$9,915
|
|
|
Sell 1 Jan. 2011 $125 Call @ $8.20 /sh.
|
|
$820
|
|
Sell 1 Jan. 2011 $125 Put @ $33.20 /sh.
|
|
$3,320
|
|
Net Cash out-of-Pocket
|
$5,775
|
|
If ESI shares move to $125 or better (+ 26.1%) by Jan. 21, 2011:
· The $125 call will be exercised.
· You will sell your shares for $12,500.
· The $125 put will expire worthless.
· You will have no further option obligations.
· You will end up with no shares and $12,500 in cash.
That best-case scenario would lead to a net profit of $6,725 / $5,775 = 116.4%
achieved in less than 15 months on shares that only needed to rise by 26.1% or more.
What’s the downside?
If ESI shares remain under $125 on Jan. 21, 2011:
· The $125 call will expire worthless.
· The $125 put will be exercised.
· You will need to buy another 100 ESI shares.
· You will be forced to lay out an additional $12,500 in cash.
· You will have no further option obligations.
· You will end up with 200 ESI shares.
What’s the break-even on the whole trade?
On the original 100 shares it’s their $99.15 /share purchase price less
the $8.20 /share call premium = $90.95 /share.
On the ‘put’ shares it’s the $125 strike price less the
$33.20 put premium = $91.80 /share.
Your overall break-even would be $91.38 /share or $7.77 below your
starting price. ESI shares could fall by up to 7.8% without causing a loss.
While that’s far from impossible a glance at my data chart will show that
there hasn’t been one calendar year in the past decade when ESI closed
lower on December 31 than the year before – including the horrendous
market of 2008!
Summary:
ITT educational Services is a high-quality growth stock at a very reasonable
valuation. All signs point to continued success in one of the few expanding areas
of our economy.
Outright purchase of the shares could easily see 30 – 40% returns over the next 12 – 18 months. Buying and writing as described could lever that same gain into a cash-on-cash return of over 116% if you’re well capitalized and willing to play with options.
You’d be protected against loss on the first 7.8% drop if we’re totally wrong on this one.
Disclosure: Author is long ESI shares and short ESI puts.
January 21st, 2010
Shares of for-profit educator ITT up on strong 4Q
Shares of ITT Educational Services rise as enrollments, profit jump, guidance tops estimates
APOL 60.77 +1.44
ESI 104.18 +6.27
NEW YORK (AP) — Shares of for-profit education company ITT Educational Services jumped Thursday on the strength of its guidance for next year and growth in enrollments and profit in the fourth quarter
The Carmel, Ind., company said its earnings grew 49 percent to $93.7 million. For the year, it earned $300.3 million, or $7.92 per share — and expects to earn between $10 to $10.50 per share in 2010.
Analysts polled by Thomson Reuters expect a profit of $9.48 per share for 2010, on average.
Shares rose $7.74, or 7.9 percent, to $105.65 in afternoon trading, running counter to broader markets. The Dow Jones industrials sank 2 percent.
ITT, which runs technology-oriented schools, said fourth-quarter enrollments rose 30 percent to 80,766 students as unemployment remained high.
Enrollments at for-profit schools have jumped during the recession as the jobless and underemployed try to bulk up their resumes.
Analyst Amy Junker of Robert Baird said she expects enrollments to continue to grow even as the economy recovers as the wage gap between those with a postsecondary degree and those with only a high school diploma continues to grow. The company’s ITT Technical Institute has “strong brand recognition,” she said, leaving it well-positioned to continue to grow.
ITT is also increasing its bachelor’s degree programs, which Junker said could result in higher operating margins. In the last quarter, ITT’s operating margin grew to 40.8 percent from 36.4 percent a year earlier.
Stocks of the for-profit sector overall have been under pressure since early 2009 because of the Education Department’s focus on recruitment practices and benefit to students under the Obama administration. The government is revamping its regulation of the schools, and some analysts fear possible changes in compensation for recruitment counselors and other issues may hit enrollment and profits.
Apollo Group Inc., owner of the University of Phoenix, the largest for-profit school, is also the subject of a probe by the Securities and Exchange Commission on its revenue recognition practices, which are not unique in the industry. Its stock added 2.5 percent in afternoon trading.