ESI - ITT Educational Services

[Phoenix01]

I am in the process of refining my model of the ESI business.  When I project forward a student growth rate of 6% (low end of traditional growth) and an increase in revenues of 8% (2% CPI) I end up with the lowest price per share in ten years around the $600.  The interesting part is that changing the P/E ratio has very little change on the final price.  This is because 100% of the earnings go to share buybacks.  As the P/E drops, the buyback increases and the EPS grows faster.  As the P/E rises, the opposite effect happens and the EPS drops, however the price in both scenarios is roughly the same.

 

The kicker is that any growth beyond 6% is gravy and the management invests in the business when the share price is high and then pulls out the funds when the prices are depressed, amplifying the beneficial effect of the buybacks.

 

Under this situation I do not see how the shorts are going to get out of their situation without bombing the schools!!!  The share count is:

Shares outstanding (Sept 30, 2010)    31.9M

Institutional Holdings (Sept & June 2010)  36.5M

Insiders (June 2010)  3.8M

Short (Sept 30, 2010)  7.7M

TOTAL = 48M (50% more than the outstanding share count without including the non-institutional accounts & Blum has been buying lately)

The longer the price stays down, the fewer shares will be outstanding.

 

 

[Phoenix01]

Here is an interesting article on ESI.

http://www.fool.com/investing/general/2010/10/26/show-me-the-money-itt-educational-services.aspx

 

I checked the Q3 report and found the following:

"Accounts receivable less allowance for doubtful accounts was $85.2 million as of September 30, 2010 compared to $93.8 million as of September 30, 2009. Days sales outstanding was 19.6 days at September 30, 2010 and 25.4 days at September 30, 2009. Our accounts receivable balance and days sales outstanding at September 30, 2010 decreased primarily due to, in order of significance:

• an increase in the amount of funds received from private education loan programs available to our students in 2010; and

• an increase in the amount of scholarships and other awards provided to our students in 2010."

[Ross812]

It seems investors didn't like the investment results or maybe something happened in their 9:45 presentation this morning.  We may get another buying opportunity; ESI is down 4.5% as of this morning.

[hyten1]

what do you guys think of coco

[Phoenix01]

It seems investors didn't like the investment results or maybe something happened in their 9:45 presentation this morning.  We may get another buying opportunity; ESI is down 4.5% as of this morning.

 

The republican sweep has essentially reduced the government’s ability further crack down on the for-profit sector.  The short argument is that the government will reign in sector, but now that it is not likely to happen, they have moved to the lawsuits.  Based on the experience with FFH, I think that the drop is simply the shorts trying to cover their position.  They even have our good old friend Herb Greenberg is covering the sector.

 

http://www.cnbc.com/id/39784175/Greenberg_Earth_to_ITT_Education

 

This is a great buying opportunity for ESI.  The share count is going to drop even quicker, resulting in higher EPS even without any growth.

 

[Phoenix01]

In true short fashion, the the law suits are starting.  The funny part is that ITT is not one of the five colleges being investigated by the Attorney General of Florida.

 

http://pr-usa.net/index.php?option=com_content&task=view&id=528398&Itemid=34

 

 

[Phoenix01]

The for-profit schools are fighting back with a law suit against the education department for collaborating with the shorts.

 

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201102021300dowjonesdjonline000374&title=for-profit-college-lobbying-group-sues-over-gao-report

 

"the Coalition in December filed a lawsuit against the Education Department, alleging it wrongfully withheld records related to the GAO report and evidence of contact with short-sellers as that agency prepared new industry rules."

 

It also looks like ESI does not have the same corrupt practices as the other major players.

 

"The GAO found what it said were problematic recruiting tactics at campuses owned by Education Management Corp. (EDMC), Apollo Group Inc. (APOL), Corinthian Colleges Inc. (COCO) and Washington Post Co.'s (WPO) Kaplan Higher Education, as well as at privately held school companies. Education Management and ITT Educational Services Inc. (ESI), not named in the report, are Coalition members."

 

This is also reflected in solid quarter they just ended.

[Phoenix01]

The best way to fight a short attack is good performance.

 

http://www.ittesi.com/phoenix.zhtml?c=94519&p=irol-newsArticle&ID=1553162&highlight=

 

ESI just put in another solid quarter and ploughed the profits into share buybacks.  The float is now down to 28M with an official short of 4.7M & institution ownership over 35M shares.  Despite this, these shares are not on the threshold list!

 

The lower the share price, the more they will buy in the shares and the higher the EPS will go.  Right now the P/E is around 6 & the P/FCF is below 12.

 

I am guessing that there is a big market for borrowing ESI shares.  Does anyone know how to tap into the share lending and the potential risks that are associated?

 

[Phoenix01]

At the end of March the short interest was 4,753,936 and the share price was $72.15.  By mid August the short interest was 9,386,983 and the share price was $74.05.  There appears to be sufficient buyers to counter the effect of the shorts.

 

Currently there are only 27M shares outstanding and institutionals own 35,828,834 shares.

 

The upside seems interesting, especially if ESI keeps up the EPS increases quarter after quarter.

[PlanMaestro]

Down another 20% today after a $46 million settlement with Sallie Mae and "concerns" on its debt covenants.

[no_free_lunch]

I wonder what people's thoughts are on this one?  It just seems so ridiculously cheap I am obviously missing something.  Even in the most recent quarter the company earned a profit.  They are forecasting $8-$9 a share in earnings for fiscal 2012.  This one-time settlement is chump change in comparison.

 

As for the liquidity issues, I don't quite get that either.  Their AR will cover their AP.  They have more cash and short term investments than long-term debt.  They generate tons of cash.  Where is this liquidity squeeze coming from?

 

I realize that the government is cracking down and their profits are probably going to take a hit at some point going forward.  Is that what the market is seeing?  Do you guys expect the earnings to flip negative over the next year? 

[MYDemaray]

Down another 20% today after a $46 million settlement with Sallie Mae and "concerns" on its debt covenants.

 

It's interesting because in a world with fewer government loan guarantees, lenders are a natural enforcer of education quality since their only collateral is the earning power of their debtors.

[Patmo]

This thing is selling for peanuts as of today. There was a monster sell-off yesterday on news of a real estate deal falling through. CEO resigned on it (effective February). I took a position at about $15/share, and obviously bought a bunch more yesterday. It was a very attractive risk/reward flip at $15, now it's just free money.

 

This thing is not for everybody because it's a more standard value play than you typically see on this board, where it has lots of shadows looming, majority of which have no effect on company's earning power. Normalized trailing P/E is under 2, EV/EBITDA 1.5 (using book depreciation not maint-capex, I also accounted for "other current liabilities" in EV). I put value at about $30ps, $4 NI x8 multiple. Pretty conservative valuation, really.

 

Company had been paying down debt heavily as of last reporting date, so if that trend continued since then, common holders should be inching close to first in line for claim on assets in worst case scenario by now (I'm not aware of any preferred stocks issued right now? Will have to re-check).

 

 

[WideMoat]

Care to comment on your balance sheet assumptions, given that there are no current financial statements available?

 

Additionally, care to comment on your assumptions concerning their liquidity?

 

As:

 

1) "Based on the Company’s current estimates, which are based on numerous assumptions and are subject to change, the Company believes that it will be required to make additional payments under the PEAKS Guarantee of approximately $115.3 million in the remainder of 2014 related to its obligations under the PEAKS Guarantee."

 

2) "As a result of the Consolidation, the Company believes that it may not be in compliance with certain of its covenants at various dates under the Credit Agreement, dated as of March 21, 2012, as amended by the First Amendment thereto dated as of March 31, 2014 and the Second Amendment thereto dated as of May 29, 2014, among the Company, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and Wells Fargo, N.A., as documentation agent (the “Credit Agreement)... The borrowings under the Credit Agreement currently total $50.0 million."

 

http://www.sec.gov/Archives/edgar/data/922475/000092247514000022/form8_k.htm

[focusinvestor]

This thing is selling for peanuts as of today. There was a monster sell-off yesterday on news of a real estate deal falling through. CEO resigned on it (effective February). I took a position at about $15/share, and obviously bought a bunch more yesterday. It was a very attractive risk/reward flip at $15, now it's just free money.

 

This thing is not for everybody because it's a more standard value play than you typically see on this board, where it has lots of shadows looming, majority of which have no effect on company's earning power. Normalized trailing P/E is under 2, EV/EBITDA 1.5 (using book depreciation not maint-capex, I also accounted for "other current liabilities" in EV). I put value at about $30ps, $4 NI x8 multiple. Pretty conservative valuation, really.

 

Company had been paying down debt heavily as of last reporting date, so if that trend continued since then, common holders should be inching close to first in line for claim on assets in worst case scenario by now (I'm not aware of any preferred stocks issued right now? Will have to re-check).

 

I couldn't resist. This is a crazy price despite the clouds. At this point, every single shareholder has lost money over the last decade!

[bizaro86]

I've been in and out of this, bought some early last year in the low teens, sold half of it for $40 (which was very close to my estimate of IV as a going concern) and certainly wish I hadn't rode the other half back down. Bought the position back at $20, and came back to my office after the long weekend here in Canada to see a hole in my portfolio where the value of those shares used to be.

 

After reading the filings this morning, I've quadrupled down at $7.xx.

 

I think this is probably money good, although it's certainly a bit of a binary outcome. As long as the company can continue to get DOE funding, its trading at an obscene multiple, even if you assume they pay out more than they expect on the PEAKS guarantee. There is only $215 million in total PEAKs indebtedness left, so even if no borrow makes a payment ever again that's their maximum exposure.

 

The company should have enough cash on hand to secure a letter of credit for the DOE if they need to, which should allow them to continue getting DOE funding for their students. The amendments to the letter of credit agreement supports this idea.

 

Basically, the thesis is the company has net cash ~= net debt (including their most recent estimate of PEAKs), owns a bunch of unencumbered real estate, and earns a few dollars per share every year.

[yadayada]

isn't government going to aggressively cut funding to schools that are below a certain graduation %?

[Fat Pitch]

Wow did the company really originate 270mm in student loans for the PEAKS Trust in 2010 and paid out 71mm+ for losses from these loans? Over 25% of these loans went sour that there was no recovery? What kind of education is this company providing to students?  :o

[Pauly]

Wow did the company really originate 270mm in student loans for the PEAKS Trust in 2010 and paid out 71mm+ for losses from these loans? Over 25% of these loans went sour that there was no recovery? What kind of education is this company providing to students?  :o

 

Haven't you seen the commercials ;)

 

I wouldn't touch any of these for-profit education companies since they're all on the government hit list to basically be put out of business. I was in COCO a few years ago but thankfully got out before it dropped ~95%.

Not only did it not make me any money, I also felt like a criminal owning such a tawdry business. I needed to take a shower after reading their reports just to get the stink off...

 

 

[DTEJD1997]

Wow did the company really originate 270mm in student loans for the PEAKS Trust in 2010 and paid out 71mm+ for losses from these loans? Over 25% of these loans went sour that there was no recovery? What kind of education is this company providing to students?  :o

 

These "skools" are giving "educations" in hard knocks.

 

It is insane that 25% of the loans are bad already.  If you make ANY attempt at all,  you can get deferrals, forebearance, and very low payments.  If you've got a few hundred dollars, you can pay student loans for a couple years after graduating.

 

For this high a percentage of loans to be this bad, this quick, suggests something else entirely.

 

Perhaps there was NEVER any intent to pay the loans back?  There could  be multiple ways of fraud going on...

 

Where do these people get hired?  Graduates from reputable schools have a hard enough time...somebody coming from ITT?  University of Phoenix?  DeVry? 

 

You've got to be kidding.

 

I think these places are hugely detrimental to society.  The sooner they are shut down, the better.

 

 

[Patmo]

I've been in and out of this, bought some early last year in the low teens, sold half of it for $40 (which was very close to my estimate of IV as a going concern) and certainly wish I hadn't rode the other half back down. Bought the position back at $20, and came back to my office after the long weekend here in Canada to see a hole in my portfolio where the value of those shares used to be.

 

After reading the filings this morning, I've quadrupled down at $7.xx.

 

I think this is probably money good, although it's certainly a bit of a binary outcome. As long as the company can continue to get DOE funding, its trading at an obscene multiple, even if you assume they pay out more than they expect on the PEAKS guarantee. There is only $215 million in total PEAKs indebtedness left, so even if no borrow makes a payment ever again that's their maximum exposure.

 

The company should have enough cash on hand to secure a letter of credit for the DOE if they need to, which should allow them to continue getting DOE funding for their students. The amendments to the letter of credit agreement supports this idea.

 

Basically, the thesis is the company has net cash ~= net debt (including their most recent estimate of PEAKs), owns a bunch of unencumbered real estate, and earns a few dollars per share every year.

 

Even if the company was wound down, you'd get about $7 a share back (excluding income from the last 6 months), assuming book value of capital assets = market value. Say $4 net of all the bullcrap that comes with winding down. 50% capped downside in true catastrophe scenario, upside is monstrous (as expected of something trading at this P/E) in almost any other scenario. I mean, let's say the company gets to continue what they're doing right now without even going back to past performance levels, just maintaining what they've been doing the past year indefenitely, the company would be worth 4x the current share price. If it does 50% worse before it stabilizes, shares would end up worth 2x what we pay for right now. "Heads I win, tails I don't lose much" is en vogue right now, isn't it?

 

I doubt the DOE is out for blood like a raging madman, just to kill FPE's for the sake of killing them. It looks for the best interests of the students, 50k students out on their ass is not exactly the best way to go about that. The most likely scenario is that FPE's will have to make some sacrifices and actually try a little, and everybody will meet in some middle ground and be relatively content with their outcome.

[DTEJD1997]

 

Even if the company was wound down, you'd get about $7 a share back (excluding income from the last 6 months), assuming book value of capital assets = market value. Say $4 net of all the bullcrap that comes with winding down. 50% capped downside in true catastrophe scenario, upside is monstrous (as expected of something trading at this P/E) in almost any other scenario. I mean, let's say the company gets to continue what they're doing right now without even going back to past performance levels, just maintaining what they've been doing the past year indefenitely, the company would be worth 4x the current share price. If it does 50% worse before it stabilizes, shares would end up worth 2x what we pay for right now. "Heads I win, tails I don't lose much" is en vogue right now, isn't it?

 

I doubt the DOE is out for blood like a raging madman, just to kill FPE's for the sake of killing them. It looks for the best interests of the students, 50k students out on their ass is not exactly the best way to go about that. The most likely scenario is that FPE's will have to make some sacrifices and actually try a little, and everybody will meet in some middle ground and be relatively content with their outcome.

 

Patmo:

 

Don't get fooled by the numbers.  That happened to a lot of people in COCO.

 

In the worst case scenario, these guys will be going "super duper bankruptcy".  COCO is not going to get anything remotely close for what their assets were being carried for.  I strongly suspect they won't get ANYTHING on quite a bit of it.

 

This industry is forever changed and is not going back to the way things were.

 

I would also be SHOCKED if it can stabilize at current levels.

 

Students and graduates are going to have a tough time overcoming the stigma of FPE, which is only going to grow in time.

 

The most important thing of all is that their customer is upset.  The government is going to change things up quite a bit going forward.

Students aren't really the customer, it is government and it's willingness to loan any amount of  money, to anybody, to study anything, at any skool.

 

Want to make a bet that will continue?

[smreitz]

Drop from past levels and now at current prices I feel tempted to invest a small amount of capital at current levels. Maybe I should plunge that amount into AWILCO instead for conservative dividend yield... ?

[yadayada]

where do you see recent book value? I can only see 2012 AR.

[bizaro86]

I've been in and out of this, bought some early last year in the low teens, sold half of it for $40 (which was very close to my estimate of IV as a going concern) and certainly wish I hadn't rode the other half back down. Bought the position back at $20, and came back to my office after the long weekend here in Canada to see a hole in my portfolio where the value of those shares used to be.

 

After reading the filings this morning, I've quadrupled down at $7.xx.

 

I think this is probably money good, although it's certainly a bit of a binary outcome. As long as the company can continue to get DOE funding, its trading at an obscene multiple, even if you assume they pay out more than they expect on the PEAKS guarantee. There is only $215 million in total PEAKs indebtedness left, so even if no borrow makes a payment ever again that's their maximum exposure.

 

The company should have enough cash on hand to secure a letter of credit for the DOE if they need to, which should allow them to continue getting DOE funding for their students. The amendments to the letter of credit agreement supports this idea.

 

Basically, the thesis is the company has net cash ~= net debt (including their most recent estimate of PEAKs), owns a bunch of unencumbered real estate, and earns a few dollars per share every year.

 

Even if the company was wound down, you'd get about $7 a share back (excluding income from the last 6 months), assuming book value of capital assets = market value. Say $4 net of all the bullcrap that comes with winding down. 50% capped downside in true catastrophe scenario, upside is monstrous (as expected of something trading at this P/E) in almost any other scenario. I mean, let's say the company gets to continue what they're doing right now without even going back to past performance levels, just maintaining what they've been doing the past year indefenitely, the company would be worth 4x the current share price. If it does 50% worse before it stabilizes, shares would end up worth 2x what we pay for right now. "Heads I win, tails I don't lose much" is en vogue right now, isn't it?

 

I doubt the DOE is out for blood like a raging madman, just to kill FPE's for the sake of killing them. It looks for the best interests of the students, 50k students out on their ass is not exactly the best way to go about that. The most likely scenario is that FPE's will have to make some sacrifices and actually try a little, and everybody will meet in some middle ground and be relatively content with their outcome.

 

I'm long here, but I think there's a few potential downsides that are missing. Past performance isn't a reasonable bar, because part of it came from booking the PEAKs revenue as profit in the past. Since they won't be doing that again, the upside is less. I also think in a liquidation the equity is probably a zero, as lawsuits from employees and students who are half done a program of study probably consume the remaining value.

 

I still think this is positive EV, as even a low probability of survival multiplied by the very large potential value covers the potential zero. Not a punch card position, more like a cheap option. I also think (and this is as close to technical analysis as I'm ever comfortable) that the huge short interest provides potential for the price to spring back on even small amounts of good news. If they file the financials and remove the threat of a DOE blackball this will probably triple within 2 weeks on short-covering.