ITT Educational's Pitch to Potential Students
On the surface, ITT Educational Service (NYSE:ESI) promises a solution to the pain of a target audience, who, for a variety of reasons, has discontinued education and is now looking for career growth. However, focusing on ESI's fundamentals and growing negative sentiment surrounding for-profit education institutions among employers, the company's stock is high-risk in our opinion. Noting in particular recent NYTimes and WSJ pieces on potentially dishonest student loan schemes, ESI is a strong short pick for 2014.
History and Current Business
ITT Tech did not developed organically and purely to solve a social need, like most other educational institutions in the United States; instead, the company was planned by educational consultants, who brainstormed tailored programs for a demographic seeking a second chance in life through accelerated career growth, more prestige, and higher income.
ITT is marketing-savvy and has launched several commercial campaigns for early and late-night television viewers; consequently, ITT Tech's 55 degree programs, including information technology, electronics, drafting, design, business, criminal justice, nursing, or health sciences fit apparent cultural needs and economic trends.
By the end of last year, ITT offered 61,000 students a chance to earn an Associate, Bachelors, or Masters degree at no less than 147 campuses and 2 "learning centers" in 39 states. ESI study programs are four quarters, each quarter 12 weeks. Full time students can expect to acquire a Bachelor's degree in 14 quarters and a Master's degree in 7 quarters, working three to five hours a day, three days a week.
Student Loan Arrangements
Also antithetical to most academic institutions in the United States, ITT Tech might face penalties for possible student loan violations, according to a recent NYTimes piece. According to the article, the Consumer Financial Protection Bureau warned the company for potentially engaging in "unlawful acts or practices relating to the advertising, marketing, or origination of private student loans." An earlier WSJ article highlighted the same issue and included another for-profit educational institution Corinthian Colleges (NASDAQ:COCO)'s facing a similar investigation.
ITT rebutted, stating publicly that its practices were legal and that it would "vigorously defend" its loan program.
A possible reason for ITT's overall drop in its financial results over the past year and our projected results for the coming year may be part of a larger, national issue: consumer pessimism about the value of further education to improve their earning capacity. Unemployment has not recovered at the rate projected by U.S. government economists. Since students must invest a considerable amount of time and money in ESI's services, they expect a return. However, a degree from ESI might not be as valuable in the future as employers are less keen on this education model.
Investors Should Shy Away
Growing skepticism about whether ESI is a good investment for a student, shaky financial results, and increasing doubts about the inner workings of ITT Tech's loan structures combine to suggest that ESI a top short for 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.