ITT Educational Services: High Tech, High Profits, High Valuation

ITT Educational Services (ESI) is one of the largest US providers of technical education, offering mainly associate and bachelor degree programs to some 47,000 students at nearly 90 ITT Technical Institutes in 33 states. The company has traditionally offered a range of technology-focused degrees in areas such as computer-aided design, engineering technology, and information technology. However, ITT also offers degrees in business, criminal justice, and health sciences. Some programs are offered exclusively online, while others are offered through combinations of classroom and online instruction.

This stock has been on a steady climb for the last 4 years, starting at $28 a share, going to $85, then on April 26, shot to $96, and now is trading at an all time high of $103. An analyst at Stifel, Nicholas just put a Hold on the stock, down from a Buy, based solely on the stock's recent rapid rise. Has it gone too far too fast? Or could it possibly keep going?

The usual reasons are behind the stock's strong performance: earnings, earnings, and more earnings. Last year, earnings per share were $2.72. This year, analysts think they'll be $3.50, then $4.05 next year. At the April 26 quarterly report, management announced earnings that were 12 cents better than consensus, at 66 cents a share, compared to 55 cents a share last year in the same quarter. Revenues were up 15.8% on a year over year comparison to $204.2 million. The company raised guidance for 2007 and sees EPS of $3.40 to $3.50, up from earlier guidance of $3.17 to $3.21.

Almost 65% of revenues come from government sponsored financial aid. In the December quarter, enrollment was up 15.6% over the same period last year, the best level since January 2004. New marketing, 2 new campuses, and new programs account for the increase in the student body. And the company recently added new recruiters to get the word out and bring students in.

Earnings should continue to do well with some analysts predicting a 16.5% increase annually, on average, over the next 5 years. Look for student enrollments going higher, regular tuition hikes, and better capacity utilization of existing facilities to bolster earnings. Furthermore ITT is now offering a baccalaureate degree in programs where it already offers an associate degree. That will keep students longer and attract new ones.

Some of the numbers: Return on Equity in 2006 was 114%. Don't expect that again any time soon. Previously, however, ROE was most often in the low 40% level over the last 10 years. That's one of the reasons the stock carries a P/E of 35. Net Profit Margin is 16%. Market cap is $3.5 billion. Current assets are 1.3 times current liabilities. Revenues were $758 million in 2006, with analysts looking for $870 million this year and $980 million next.

ITT is doing all the right things. The leverage potential is very strong, not only with higher usage of current campuses but with its online offerings. There is literally no limit to how large enrollment can be once the Internet is used as an educational tool. The only real caveat: the stock has run up strongly for a relatively long time. Usually stocks take a breather.

The Good: Enrollment, campuses, profits, all growing.
The Bad: Valuation is relatively high.
The Ugly: If you don't own it, stock recently jumped to new all time high.

ESI 1-yr chart

Disclosure: none