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After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market.... More
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  • ITT Educational Services – (De )Greed is good! 0 comments
    Oct 26, 2009 07:21 PM | about stocks: ESI
    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 Line gives ESI a ‘B++’ for financial strength while noting 95th percentile scores for both ‘earnings predictability’ and ‘share price growth persistence’ (with 100th being 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.
     
    *****************************************************************************************************
     
    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.
    Themes: long ideas, options, education Stocks: ESI
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