ESI - ITT Educational Services

[Patmo]

OK so contingent liability for 2009 RSA was recorded at 113mil as of June 2014 so it's clear they don't expect underlying loans to go to zero across the board if they expect a "potentially material" gain on 2009 program yet have to pay 120mil.

 

There was no reason to not write off the receivables entirely if they were completely impaired when they wrote down PEAKS stuff, if you're going to take a large hit might as well do it all in one go. Yet they wrote off about 50%. Applying this assumption would mean up to a 50mil gain on 2009 RSA, pretty huge. Recovering half of the loans is not exactly an unrealistic achievement even given the circumstances, so I don't think I'm being overly optimistic here.

 

They sure as hell better operate as if there were no underlying loans recoverable though... Consider them a nice bonus if they materialize. 120mil net liability is ceiling now, anything less will be gravy.

[Guest roark33]

I think there is a big incentive to play around with the loan values.  They have a lot of financials covenants on both PEAKS and RSA that require more collateral, also their financial ratio with Dept of Ed is impacted by balance sheet items. 

 

I have followed this company for about 3 years now.  It was always instructive, every conference call, the loan reserves were based on "unprecedented" default levels, and they were "being very, very conservative" in assuming low recoveries, however, each quarter, the default rate kept going up.  It started out around 10% rate out of the gate, and I think PEAKS made it all the way up to 65% default rate before they brought them on the books--and they haven't had a conference call taking questions since then. 

 

I have always assumed recoveries would be 0 on both of those two programs...

 

I talked to the CFO about two years ago, and they were having issue with the servicer, they claimed, so the servicer couldn't collect, so they would have to write off the loan and pay it off, but since they weren't in charge of the servicing per the off-balance sheet agreement, they couldn't control that process.  All of those loans are lost, they can't go back and try to collect now.

 

Anyway, I think the loan recoveries are immaterial, if anything, and the investment thesis should be based on the company being cash flow positive going forward....Not sure if that is possible to know given the lack of disclosure in the past 5 months....

 

 

[Patmo]

I think there is a big incentive to play around with the loan values.  They have a lot of financials covenants on both PEAKS and RSA that require more collateral, also their financial ratio with Dept of Ed is impacted by balance sheet items. 

 

I have followed this company for about 3 years now.  It was always instructive, every conference call, the loan reserves were based on "unprecedented" default levels, and they were "being very, very conservative" in assuming low recoveries, however, each quarter, the default rate kept going up.  It started out around 10% rate out of the gate, and I think PEAKS made it all the way up to 65% default rate before they brought them on the books--and they haven't had a conference call taking questions since then. 

 

I have always assumed recoveries would be 0 on both of those two programs...

 

I talked to the CFO about two years ago, and they were having issue with the servicer, they claimed, so the servicer couldn't collect, so they would have to write off the loan and pay it off, but since they weren't in charge of the servicing per the off-balance sheet agreement, they couldn't control that process.  All of those loans are lost, they can't go back and try to collect now.

 

Anyway, I think the loan recoveries are immaterial, if anything, and the investment thesis should be based on the company being cash flow positive going forward....Not sure if that is possible to know given the lack of disclosure in the past 5 months....

 

Fair enough, as I said (or at least I think I said that lol...) it's better to operate under that assumption anyway. But any extra bit of breathing room helps. It would certainly be welcome if that "write up" was the real deal. But whatever, we'll see what happens.

 

Re:Cash flows, They've finally taken a no-nonsense approach to making their programs' value proposition more attractive, so future cash flows should stabilize/improve but results won't necessarily show right away... Hopefully it doesn't get significantly worser (excuse the English) before it gets better.

 

I'm going to put my tinfoil hat on and speculate that John Dean has a lot to do with this... Under Modany's leadership, the company did nothing for years, expecting things to just blow over. Turns out it's not that easy. Who would have thought..........................

 

I'm curious, you mentioned you have been involved in both short and long sides of this company. Do you have a position right now? Or just following?

[DTEJD1997]

There was another thread on this company with more current discussions. Anyway, I first got in at $15 a share and doubled down at $8. I figured the coin toss was quite enticing at $15, at $8 very exciting. At $5ps, it's not even a coin toss anymore. Heads, uncertainties go away and you make 10x your money. Tails, the company liquidates and you still make a profit???

 

How do you figure you will make 10X on your money?  "For profit" education's hey day is long gone and never coming back.  Skools are under increasing scrutiny because of the laughable expense, high rate of drop outs, and terrible outcomes for their graduates.

 

How do you figure if it liquidates you will still make a profit?

 

Their assets are probably largely illiquid.  They tried to monetize their real estate and couldn't do it.  Nobody is going to want to have anything to do with "for profit" education.  They have a bad reputation and are untouchable.  There is no brand equity...Nobody will want to buy existing locations/schools.

 

COCO rocketed higher on Friday to $.14/share...I don't see any way that the stock does not wind up as a zero.

 

There is a strong chance that most players in the "for profit" sector wind up the same way.  These guys are socially destructive.  Many, many, many lives have been ruined by them.

 

The law suits are only getting started.  I imagine we will start to see many lawsuits from former students and graduates.

 

Who hires graduates from these places?  Who in their right mind would go to one of these places?  I don't see things getting better...their reputations will fall further as more & more people are aware of their problems.

 

If the government decides to cut back on student loans, these places are in "super duper" bankruptcy.

 

Interesting...looks like I was right about COCO.  Their "assets" turned out to be worth no where near worth what they were carried for.  NOT EVEN CLOSE.  Shareholders will get nothing.

 

On a different note, University of Phoenix enrollments are down 50% over the past few years.  I am surprised they are as high as they are.

 

Potential investors must think about this...

 

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

 

 

 

[giofranchi]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

[Phoenix01]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

[DTEJD1997]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

 

How about this?  Would you be WILLING TO HIRE a graduate from a "for profit" skool?

 

I doubt very many people on this board would hire a graduate from one of these places.

 

In Europe, I have no idea, and can't offer an opinion.

 

I don't have a problem with educators running a school and making a profit.  If they do, they need to provide REAL VALUE to the vast majority of their students.  That is NOT the case with the bulk of for profit skools in the USA.

 

There are some very small operators/divisions that do provide real value...but they are a VERY small percentage of the industry.

[giofranchi]

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

 

I’d wish my children don’t need a school to learn what might be useful for their professional life… I hope they could become “learning machines”… But I also know the great majority of people simply aren’t. And those who aren’t need guidance and help to keep learning and improving and staying competitive.

 

If my children won’t be among the very few self-taught individuals, I would certainly recommend they follow some courses of ours! ;)

 

Gio

 

[Phoenix01]

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

 

I’d wish my children don’t need a school to learn what might be useful for their professional life… I hope they could become “learning machines”… But I also know the great majority of people simply aren’t. And those who aren’t need guidance and help to keep learning and improving and staying competitive.

 

If my children won’t be among the very few self-taught individuals, I would certainly recommend they follow some courses of ours! ;)

 

Gio

 

I like the way you think and the way you phrased your answer (I will show it to my kids).  However, I would still like to know if would you recommend to your friends that they send their children to this school, and why.

[Patmo]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

And ITT is in the process of trying to bring that value back...

[giofranchi]

How about this?  Would you be WILLING TO HIRE a graduate from a "for profit" skool?

 

Lots of companies that work with us have expressly told me they always wait to meet our students before hiring people. Because they find our students to be far more productive than those candidates who have graduated in engineering without attending some sort of post-graduate course afterwards. :)

 

Gio

 

[Phoenix01]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

And ITT is in the process of trying to bring that value back...

 

I am not so sure.  The CEO spent years fleecing the students and buying back shares so that his bonuses would grow over time.  They were very efficient, but their motivation was $$$ not the students.  I doubt that the culture will change quickly, but you never know.

[giofranchi]

I like the way you think and the way you phrased your answer (I will show it to my kids).  However, I would still like to know if would you recommend to your friends that they send their children to this school, and why.

 

I will surely answer your question... But right now I have to go! ;)

 

Cheers,

 

Gio

[Patmo]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

 

How about this?  Would you be WILLING TO HIRE a graduate from a "for profit" skool?

 

I doubt very many people on this board would hire a graduate from one of these places.

 

In Europe, I have no idea, and can't offer an opinion.

 

I don't have a problem with educators running a school and making a profit.  If they do, they need to provide REAL VALUE to the vast majority of their students.  That is NOT the case with the bulk of for profit skools in the USA.

 

There are some very small operators/divisions that do provide real value...but they are a VERY small percentage of the industry.

 

Our controller went to DeVry, didn't stop her from obtaining her CMA designation and having a career and whatnot.

 

I'd be hard pressed to find someone on these boards unwilling to contemplate an investment in US banks, yet their behavior has not been on par but WORSE than FPE on a CONSISTENT basis since forever. I'm sure foreclosing on random mortgage-free homes is bringing great value to society... But I digress.

 

[Phoenix01]

IF A SKOOL IS READY & WILLING TO RIP OFF THEIR STUDENTS, WHAT DO YOU WANT TO BET THEY WILL RIP OFF THEIR INVESTORS?

 

I don’t know much about for profit education in the US.

 

But one of those two companies of mine is a for profit post-graduate master school, and I would saying it is doing very well! This year we will probably end up almost doubling revenues!

 

Imo for profit education, provided you offer true value to your students, is a good industry to be in: education requires very little capital, will always be needed, and will always do good.

 

Cheers,

 

Gio

 

It is all about providing value to customers.  Would you send your kids to the school you own?  Would you recommend it to a friend?

 

How about this?  Would you be WILLING TO HIRE a graduate from a "for profit" skool?

 

I doubt very many people on this board would hire a graduate from one of these places.

 

In Europe, I have no idea, and can't offer an opinion.

 

I don't have a problem with educators running a school and making a profit.  If they do, they need to provide REAL VALUE to the vast majority of their students.  That is NOT the case with the bulk of for profit skools in the USA.

 

There are some very small operators/divisions that do provide real value...but they are a VERY small percentage of the industry.

 

Our controller went to DeVry, didn't stop her from obtaining her CMA designation and having a career and whatnot.

 

I'd be hard pressed to find someone on these boards unwilling to contemplate an investment in US banks, yet their behavior has not been on par but WORSE than FPE on a CONSISTENT basis since forever. I'm sure foreclosing on random mortgage-free homes is bringing great value to society... But I digress.

 

I have not invested in them  ;) and won't (I do not trust or understand them).

[giofranchi]

I like the way you think and the way you phrased your answer (I will show it to my kids).  However, I would still like to know if would you recommend to your friends that they send their children to this school, and why.

 

I will surely answer your question... But right now I have to go! ;)

 

Cheers,

 

Gio

 

Phoenix01,

My experience is that, after 6 years spent studying engineering and graduating from two of the most prestigious Universities in Europe (both The Polytechnic of Milan and the UPC Universidad Politecnica de Catalunya, Barcelona), I still had almost no means to help me thrive in a market economy...

 

- I still had never read a true balance sheet, a true income statement, nor a true cash flow statement.

- I still had never heard about value investing.

- I still had never thought about how the markets truly work.

- I still had never thought about the psychology of decision making.

- I still had never thought about what constitutes good business and what doesn’t.

- Also technically I was full of great and complex theories, but know very little of practical use.

 

Yet, I was asked right away to help manage and supervise site works with hundreds of workers and which cost many tens of thousand Euros each day…!!

 

Clearly, I was not prepared. And if I managed to do relatively well, it is only because I am a “learning machine”, I read and study everyday all day long, and it is a real pleasure for me, not a burden at all.

 

But, as I have said, not everybody behaves that way…

 

My hope is through our postgraduate courses people might get at least interested or “nudged” into learning technical and non-technical means that could really be useful to them in a market economy. Where such a nudge might lead no one can really be sure of: the ultimate outcome of course depends on how productive a use each one of our students will make of those means.

 

Cheers,

 

Gio

 

[Phoenix01]

Gio,

 

A degree is a qualification.  In this case, it shows that you were able to complete courses and learn the basics of a particular field.  What you do outside of school has a much bigger impact on your future.

 

I am only talking about obtaining a degree.  If a friend is convinced that it is a good thing to have a degree, would you recommend the school in which you have invest?  If not, then why?

[giofranchi]

If a friend is convinced that it is a good thing to have a degree, would you recommend the school in which you have invest?  If not, then why?

 

I thought my answer was clear enough: our alumni don’t just “get a degree”… Imo they are given very useful information for their professional life! I wouldn’t be doing this otherwise. :)

 

Cheers,

 

Gio

 

[Patmo]

Some news came out yesterday:

 

-Solid Q ended sept 2014

-Horrible enrollment #'s for most recent Q

-CFO also resigning, we should get fresh governance soon after the reporting catches up. I'm going to speculate again that Mr. Dean has a hand in this as since he's been appointed, small clues have kept springing about of the company exiting complacency. I'm not just hoping for an ethically straight C suite but a competent one as well, looking for old guys like Dean who have been around FPE for decades and know the ins and outs of the business.

[Guest roark33]

Attendance decline is really getting to the point of testing their ability to be cash flow positive.  End game with Cerberus will be interesting.  I don't know if Cerberus thinks they can monetize the real estate or want the loan paid in full. 

 

No reason I can see to be long here, and I would wait for some irrational spike to the low teens to get short again (maybe 8-9), but still following. 

 

I really can't believe a public company can go this long without filing adequate and up-to-date financial statements.  De-listing is like telling your kids you are going to turn the car around on vacation, lots of threats, no action.

[DTEJD1997]

Hey all:

 

Looks like ESI is about to join COCO.

 

Price is now down to $2.  There are allegations of MASSIVE student loan fraud & coverup going on.  Two of their executives have been formally charged with fraud by the SEC:

 

http://www.usatoday.com/story/money/business/2015/05/12/itt-educational-services-sec-fraud-charges/27169703/

 

Of course, the company & executives vehemently deny it.

 

Apparently we are talking about HUNDREDS of millions of dollars.

 

If the allegations are true, I don't see how this is NOT A ZERO.

 

EDMC is also circling the drain.

 

The faster these places are shut down, the better.

 

Hopefully a lot of people will be going to jail over this. 

[Guest roark33]

I think it is probably a zero also at this point, but the timing is difficult.

 

Almost a game of chicken between Peaks/CUSO/Cerberus as to who wants to call an Event of Default based on the fraud disclosures in the SEC letter.  They are pretty clear that the execs consulted an legal counsel about the legality of making payments on behalf of borrowers and counsel said No, but they went ahead and did it and didn't disclose this legal opinion to the auditor. 

 

Cerberus might want to push them into bankruptcy, because they could own the equity on the cheap on the way out, paying the second in line lenders, Peaks and CUSO, off at 80 cents on the dollar with cash and real estate, and then run the operations without those legacy debts. 

 

Not sure, will be interesting one to watch...

[benhacker]

I thought this was a nice summary of the situation with the SEC:

 

http://www.secactions.com/sec-files-fraud-action-centered-on-student-loans/

[giofranchi]

DTEJD1997,

 

I don’t follow ESI, but I guess if they have been accused of fraud by the SEC, something very serious and bad is going on there… I cannot tell, and I don’t really care.

 

Instead, I would like to know why you seem to be so negative about for profit education in general:

 

1) Is it because you think those schools teach their students nothing truly worthwhile?

2) Is it because you think a diploma is useless?

3) Is it because you think companies are not interested in hiring students who graduate from those schools?

4) Is it because their courses are too expensive and don’t offer any value at all?

5) Is it a combination of 1) to 4)?

 

You seem to be knowledgeable of the sector, and I am asking because right now my company is doing very fine… but I might be missing something and I might encounter obstacles down the road… Whichever warning is thoughtful and justified might also be very helpful and therefore is very welcomed!

 

Thank you,

 

Gio

 

[Rust Belt Capital]

Pretty much all 4 of those.  These companies do not care in the slightest about the education provided to students.  I'm sure some of the instructors do, but the business as a whole is only in it to get those tasty Title IV taxpayer dollars, usually through aggressive and/or deceptive marketing. These schools spend ~25% of revenues on marketing, spend roughly 1/4 as much on instruction per student as public institutions, employ ~2.5 recruiters per career/support services staff, more than half of students leave after two years w/ no degree. 

 

IMO the number of recruiters is the most damning stat.  If the argument that for-profit schools are good for "non-traditional" students, investment in support services to help keep students on track and help them find a job (especially considering their degrees are at significant disadvantage to traditional schools in the job market) would be a priority, not marketing. But as long as they keep them enrolled long enough for the taxpayer's check to clear, they don't give a shit.

 

Obviously the non-profit sector of American higher education has a litany of major issues as well, but these companies are despicable.  Not only do they feed off of taxpayer dollars via exploiting veterans, the underprivileged, etc., most are lighting shareholder's money on fire! They are terrible both the "for-profit" portion, and the "education" portion, and are doing it on the publics dime to boot.

 

/End rant.  Maybe I am a tad biased.  I once spent a summer interning for an analyst who had some of the public for-profit names on his coverage list.  I spent most of the internship compiling a big industry fact book type thing, and everything I learned about these companies has just completely disillusioned me to the entire for-profit ed industry.  I'm sure there are good people out there working in it, but they are likely few and far between