Chuck Carnevale's  Instablog

Expanding Minds an Expanding Business

Thanks to the recession, more and more people nationwide are making the “smarter” move. They are going back to school, that is, in order to increase their value and attractiveness in a distressed workplace environment. This is proving to be a boom for ITT Educational Services, Inc. (ESI), one of the leading post secondary education providers in the country. ITT Educational Services, Inc. (ESI) is headquartered in Carmel, Indiana.

Traditionally, ITT Educational Services, Inc. (ESI) provided technology-oriented degree programs to help students develop skills and knowledge they can use to win jobs in numerous fields. More recently, they have expanded their offerings to include new associate and bachelor degree programs as part of their growth strategy. In addition to diversifying their curriculums, they are also expanding geographically.

Accelerating Growth

Business for ITT Educational Services, Inc. (ESI) has been exceptional. They are one of a very few companies that can boast of an expanding earnings growth rate right through the recent recession. Figures 1 through 4 show that their rate of change of earnings growth has actually been accelerating in recent time frames.  To be clear, their *17-year growth rate (red circle, Figure 1) is lower than their *14-year growth rate (red circle, Figure 2) which is lower than their *11-year growth rate (red circle, Figure 3) which remarkably is lower than their *5-year growth rate (red circle, Figure 4.)

In Figure 1 notice how closely ITT Educational’s stock price, (black line) has followed earnings (green line with white triangles) since 1994. Also note how undervalued the price is currently thanks to recession fears. 

Fig. 1. ESI 17yr EPS Growth and Price Performance

Nevertheless, note how shareholder returns closely correlate to earnings and how little they correlated to the stock market. (Purple circle).

In Figure 2, we find that the rate of change of earnings growth of ITT Educational Services, Inc. (ESI) has been higher since 1997, than since 1994. (Red Circle). Thereby, indicating acceleration.

Fig. 2. ESI 14yr EPS Growth and Price Performance

Figure 3 includes the last two recessions we have suffered, and yet we see further acceleration in the rate of change of earnings growth for ITT Educational Services (Red circle). Take special note of the extraordinary return shareholders of ITT Educational Services would have enjoyed in contrast to a terrible 10-year period for the S&P 500. (Purple Circle).

Fig. 3. ESI 11yr EPS Growth and Price Performance

Finally, in Figure 4 we discover more earnings acceleration yet (red circle), however stock price is below earnings justified levels, implying a long-term bargain.

Fig. 4. ESI 5yr EPS Growth and Price Performance

*(Note that our historical Fundamentals-at-a-Glance earnings correlated graphs include the current year and one year of forecast, i.e., a 17-year chart has 15 years of history, the partial year we are in, and one year of forecast.)

A Paragon of Consistency

Of all the publicly-traded educational companies, ITT Educational Services, Inc. has been one of the most consistent and fastest growing. Since 1969 its legacy ITT Technical Institute offered technical degree programs that fill an important educational gap.

ITT Technical offers the following six schools:

1. School of Information Technology
2. School of Electronics Technology
3. School of Business
4. School of Criminal justice
5. School of Health Sciences
6. School of drafting and design

Poised for Future Growth

Today ITT Educational Services is expanding its curriculum as demand for higher education has never been greater. In addition to their associate degrees they are adding bachelor programs and an online MBA program. Also, in 2007 they received regulatory approval to offer an Associate Science Degree program in nursing with plans to rollout this program in several states. As baby boomers age and the over 65 demographic continues to expand, the demand for qualified nurses will increase. Although the recession has temporarily reduced demand, longer term, nurses should be in high demand. In April of 2009 they purchased Daniel Webster College of New England. This adds additional bachelor and master degree level programs to their curriculum.

Last quarter ITT opened five new campuses; two in Florida, one each in Virginia, Indiana and California. This brings their total to over 112 Technical Institutes plus several learning centers and the newly acquired Daniel Webster College. We expect ITT Educational Services to continue opening new campuses and expand their newly acquired Daniel Webster College.

Headline Risk Equals Opportunity

The private education industry has been in the news lately. Apollo Group, a major competitor, received an SEC inquiry into their revenue recognition practices. Then Barron's ran a negative article on the industry that we believe was grossly unfair. In addition to ITT Educational Services, Inc., the entire industry has generated strong profit growth right through the recession. That seems to bother some people.

In our view, education is a noble pursuit and never wasted. This industry provides affordable and accessible education opportunities to people that are otherwise excluded from mainstream colleges and universities. In particular, the ITT Technical Institute provides practical skills-based learning that graduates can apply directly to the workplace.

Although education is never cheap, ITT Educational Services, Inc. offers their curriculums at lower cost than mainstream public and private universities and colleges. Funding, however, is becoming an issue and ITT Educational Services is responding. They have and are arranging private funding with major banks to fill any gaps in student loan availability.

Attractive Valuation

Even after 36 consecutive quarters of strong earnings growth, the market is only capitalizing ITT Educational Services Inc.’s earnings at 12.5 times. Since their normal PE Ratio has averaged over 25 times, we see this as a bargain valuation. Concerns about lending and its effects on their balance sheet, potential increases in advertising costs and recent accounting changes have investors currently skittish. We believe these fears are overblown and, therefore, ITT Educational Services, Inc. is a compelling choice for investors seeking growth at a reasonable price.

Full Disclosure: Long ESI at time of writing