ESI - ITT Educational Services

[giofranchi]

Thank you Rust Belt Capital,

If half of that is true… I really had no clue what for-profit education in the US actually is! And I would agree it is a shame.

 

Gio

 

[Lowlight]

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

 

So do you think there are any players within the industry who aren't bad actors?  I would assume that the more negative news that comes out about the bad actors would help the good actors at the end of the day (should there be any).  I am long GHC so I obviously believe that Kaplan is a good actor. But would like to hear whether you think any of the for profit colleges can be good actors. 

[Rust Belt Capital]

If you're interested in reading up on it, this report from the Senate has a pretty in-depth school-by-school analyis

 

http://www.help.senate.gov/imo/media/for_profit_report/Contents.pdf

 

 

http://www.propublica.org/article/the-for-profit-higher-education-industry-by-the-numbers

http://www.propublica.org/article/recruiters-experience-at-one-for-profit-university-suggests-reform-efforts-

 

[Rust Belt Capital]

 

So do you think there are any players within the industry who aren't bad actors?  I would assume that the more negative news that comes out about the bad actors would help the good actors at the end of the day (should there be any).  I am long GHC so I obviously believe that Kaplan is a good actor. But would like to hear whether you think any of the for profit colleges can be good actors.

 

It's been a bit since I've looked in depth, but from what I recall Grand Canyon (LOPE) was the school that seemed to be the best actor.  They focused more on traditional brick and mortar campuses, which they found had significantly higher retention rates.  A quick glance at that senate reports that had far lower than average student default rates, not sure if that still holds true.  But at the end of the day I think this is a busted business model: little to no value provided for the customer combined with massive regulatory risk (compounded by the fact that ~75% of some of these guys tuition comes from Title IV) spells value trap to me

 

This ITT suit think has re-kindled my interest in this sector, but more from the short side.  I think the consensus view is that there will be significant consolidation via mergers or bankruptcies, so the biggest risk in my mind on the short side is that your short of choice gets bought out.  This is why CECO putting up their culinary school (Le Cordon Bleu I think?) up for sale should be an interesting gauge of what sort of market there is for these assets, because I don't know what buyer wants to step in and take on the massive amount of regulatory risk these guys have.  If these schools cant find a buyer when they decide to divest assets, they usually "teach-out" the schools (i.e. let students currently enrolled finish up) in order to appease regulators, which I imagine is a big ole drain of cash.

 

I think I am going to dive in to these guys over the weekend and see what I can find.

[giofranchi]

Rust Belt Capital,

Let me ask you one last question: do you think a diploma is useless, because the content of the courses is so poor, or you think a diploma is useless regardless of what students actually learn?

 

Thank you,

 

Gio

 

[BeerBBQ]

If you're interested in reading up on it, this report from the Senate has a pretty in-depth school-by-school analyis

 

http://www.help.senate.gov/imo/media/for_profit_report/Contents.pdf

 

Quote from page 169 of the report:

 

"The existing capacity of non-profit and public higher education is insufficient to satisfy current,

much less future, demand, particularly in an era of drastic cutbacks in state funding for higher education.  Even if resources were available to make significant new investments in community colleges, it would be virtually impossible to accommodate the 2.2 million postsecondary students who currently attend for profit colleges.

 

The for-profit sector will continue to play an important role in providing capacity to the

Nation’s higher education infrastructure. And, indeed, the sector can play a constructive role, bringing much-needed innovation to the higher education sector and producing graduates in high-demand fields."

 

Seems clear that both political parties recognize that all for-profits are not going to be eliminated. However, in order to stay in business, they need to play by the govt's rules.   

 

[Rust Belt Capital]

That assumption is true if you assume that the current rate of demand for higher education in America holds up.  But I would argue that it will not: look at the number of people with bachelor's degrees that are working for barely above minimum wage or unemployed.  Higher education enrollment has grown non-stop in the past few decades, but average earnings for bachelors degree holders has barely moved, and tuition has skyrocketed.

 

In its current structure the US higher education system is incredibly overbuilt in terms of capacity, something is going to have to give, and I'd put my money on the weakest link being the first to give way.  If you truly think that for-profit education provides any actual value to society, and  will prove to be  economically viable in the long-run, more power to you but I'm taking the other side of that bet.

[constructive]

Even in their prime, these companies were making roughly 25% profit margins, and the government was making nearly -25% profit margins on their loan programs. Relying on massive government subsidies is unsustainable. This also has implications for solar.

 

It's a really bad sign when your primary competitors are nonprofits with huge competitive advantages over you.

[cobafdek]

I really had no clue what for-profit education in the US actually is! And I would agree it is a shame.

 

Gio

 

Gio,

 

Out of curiosity, how do students at your school finance their education?  and, in general, how is higher education financed in Italy/Europe?  Is there a massive credit industry to support education (as it is in the U.S.), or is it more by direct government payment?

 

Thanks.

[DTEJD1997]

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

 

Gio:

 

So many things I could tell about "education"!  I have friends & family in the education industrial complex.  I have gone through it myself.  I am living outside of Detroit (which is a very special case), and I know many younger people, and have had employees go to a "for profit" school.

 

I am VERY negative on education in general and "for profit" specifically for many reasons...

 

To specifically address your points, it is ALL four points to one degree or another....

 

A). I can remember from my primary & high school days many, many, many wasted, useless days.  For example, in computer class, they were trying to teach us BASIC programming.  This is in the days of GUI interfaces (MAC & Windows).  Who is programming in BASIC?  How about how a computer works?  How about spreadsheets?  Word processing?  Databases?  An absolute total waste of time.

 

Another example is history class.  Teachers would poorly plan it out.  We spent 2 weeks learning about their favorite niche (Spanish Inquisition, English civil war, etc).  Then time is running out in class so history from 1850 to current day is taught in 4 days.  Literally spent 15 minutes on WWI, 15 minutes on Great Depression, and so on.

 

Highly ineffectual...

 

Undergraduate in college was substantially better and I learned many important things...

 

Graduate Skool?  A complete waste of time & resources.  An almost worthless degree...Reality and what skools are promoting are 2 different things.

 

B). Most diplomas are now useless, especially liberal arts.  HOWEVER, a liberal arts degree from Harvard probably has some pull.  Liberal Arts from Eastern Michigan is probably not worth the paper it is printed on.  As to "for profit", it depends.  Diesel Engine Repair from a reputable "for profit" is probably worth something.  A culinary diploma? NOTHING, most other degrees are also worth nothing. 

 

Some are, most aren't.

 

C). Most companies won't touch people with degrees from "for profit" schools.  It is not 100%, but it is pretty bad.  Mechanic? HVAC, trades  Probably OK.  Something else?  Probably not

 

D). Courses are frequently shockingly expensive.  It has gotten to the point where EVEN IF you get a job in your desired field, it does not matter.  You spent too much on the degree and you won't be able to make it worth while...

 

E). I could go on and on and on....but I've negative on education for a long time now.  The USA does not really need any more education.  We need jobs, good jobs, we need opportunity for the youth.  Education is broken & corrupt here.

[giofranchi]

Gio,

 

Out of curiosity, how do students at your school finance their education?  and, in general, how is higher education financed in Italy/Europe?  Is there a massive credit industry to support education (as it is in the U.S.), or is it more by direct government payment?

 

Thanks.

 

Hi cobafdek,

 

We offer 1 year master courses for people who have already studied 3 years of engineering (first level master courses) and for people who have studied 5 years of engineering (second level master courses).

 

Our master courses are both on site and online. They cost 6,500.00 – 10,000,00 Euros for those who want to follow on site, 3,500.00 Euro for those who want to follow online.

 

The first 6 months are of lessons: after 5 years of engineering people have lots of theories but very few practical tools. 6 months are clearly not enough to fill in all the gaps between theory and practice, but at least we strive to get our alumni acquainted with those tools which might turn out to be the most useful for their future professional life.

 

The second half of the year is an internship in some construction companies, engineering firms, or real estate developers, which are the so-called “industrial partners” of ours. It usually is a great working experience, that many times (though not always, of course!) results in an ongoing working relationship between our alumni and our industrial partners.

 

I think it is a win-win situation: our alumni need a real project to work on for their master thesis and want to get to know companies which are leaders in their field, on the other hand our industrial partners have very motivated people who work within their organizations for 6 months at almost no cost, with much time to evaluate how good and reliable they actually are.

 

People who enroll in our master courses generally come from wealthy families, therefore they pay cash without the need of a mortgage.

 

Government is not involved at all.

 

Cheers,

 

Gio

 

[giofranchi]

E). I could go on and on and on....but I've negative on education for a long time now.  The USA does not really need any more education.  We need jobs, good jobs, we need opportunity for the youth.  Education is broken & corrupt here.

 

WOW...!!

 

I can only say that imo education might be “corrupt”, but doesn’t have to. We need good jobs, sure! But good jobs are always changing and with them the knowledge and the practical tools which are necessary to achieve a performance that might get better and better. We call it “life long education” (and it is not just a slogan!).

 

Some people don’t need any help, others do. Some companies give help to those who need it, others don’t. And I hope master schools like ours might always play a significant role.

 

Salini-Impregilo is by far the largest construction company in Italy. They came to us asking for a master course specifically thought out in order to train their future employees and managers. They work around the globe and they create good jobs. Yet, they also need skillful managers who have been accurately trained.

 

Cheers,

 

Gio

 

[Phoenix01]

Gio,

 

I think the big problem is when a for-profit is not delivering value to it's customers.  One good way to identify it, is to see if they are running the enrollments like a ponzi scheme.  Eventually they hit a wall (like ESI did) and then it unwinds quickly.

 

I hope yours is an honest one that delivers value.

 

[constructive]

gio,

The value your school offers sounds excellent. Prestigious graduate engineering degrees in the US probably run 3-4x that much. Even the least prestigious schools would cost at least 2x.

 

I suppose part of the issue is that the US system has huge headline tuition rates which are offset by large scholarships, grants and below market rate loans. The misguided belief that extremely expensive tuition is normal is part of the reason for-profit schools have been able to do significant damage to their customers in the US.

[cobafdek]

. . . they pay cash without the need of a mortgage.

 

Government is not involved at all.

 

That's great! - I'm glad you're in a niche position.  With direct payment from the students, you would feel the natural incentive to provide a quality service to your customers, and they have power to demand it:  virtues of a true market system. 

 

May you never have to deal with an Italian-style Sallie Mae.  Once students/customers turn over responsibility for payment to some third-party, corruption can get a foothold.  Here in the U.S., a large part of the problems associated with education and medical care is that government-sponsored public-private partnerships, or the government itself, pay the providers.  Large bureaucracies are now the middlemen, and corruption can thrive.

[DTEJD1997]

WOW...!!

 

I can only say that imo education might be “corrupt”, but doesn’t have to. We need good jobs, sure! But good jobs are always changing and with them the knowledge and the practical tools which are necessary to achieve a performance that might get better and better. We call it “life long education” (and it is not just a slogan!).

 

Gio:

 

Sounds like your "for profit" education actually delivers value to the customer.  It is also VERY inexpensive.  The vast majority of education in the USA is nothing like this.

 

Keep up the good work!

[giofranchi]

I hope yours is an honest one that delivers value.

 

Honesty: 100%.

I take any hint I might be doing something dishonest more as an insult to my intelligence than to my morality. ;)

 

Value: we constantly strive to do the best we can, and right now everyone involved seems to be quite satisfied, but of course I cannot guarantee for the future…

 

Cheers,

 

Gio

 

[giofranchi]

The vast majority of education in the USA is nothing like this.

 

Yeah! That's what I am beginning to understand... And why I have said I had no clue what for-profit education in the US actually is! ;)

 

Cheers,

 

Gio

[DTEJD1997]

Yeah! That's what I am beginning to understand... And why I have said I had no clue what for-profit education in the US actually is! ;)

 

Cheers,

 

Gio

 

Gio:

 

A lot of education in USA is being run on fraud.  Perhaps the best example of this is the situation with law schools.  Harvard, arguably the best in the USA, charges about $50k a year in tuition.  That is fine.  Almost all graduates from Harvard have a good outcome...

 

There are "schools" that are ranked near the bottom.  They ALSO charge $50k a year!  Half of their graduates CAN'T pass the bar exam!  Yet, they claim they have employment rates are 95%+ and the median salary of a grad is $80k.  This school is lying about the quality & value of their education and the outcomes of their students.  Unfortunately, this school is not the only one.

 

The ABA won't pull this school's accreditation.  They are being sued by many of their graduates.  Outcomes for almost ALL of their students are horrendous.  They have ruined lives.  You can't bankrupt out of student loan debt.  I work with one of their top graduates from 2013.  It took her over a year to get a job.  She works VERY hard to make about $40k a year.  She has a tremendous amount of student loan debt.  Hardly a good outcome for one of the top graduates.

 

Outcomes for the typcial "for profit" graduate are even worse than this.  They are saddled with mountains of debt for a worthless degree.

[giofranchi]

Thank you DTEJD1997,

it is now very clear to me why you are short such a business model.

I just wanted to dig a bit deeper than I had done before, to more clearly realize which are the differences between a business model you are very skeptical about and the one I am deeply involved with instead.

And now that I think I have found many, I am a bit less worried! ;)

 

Cheers,

 

Gio

 

[cobafdek]

And why I have said I had no clue what for-profit education in the US actually is! ;)

 

A lot of education in USA is being run on fraud.

 

There are "schools" that are ranked near the bottom.  They ALSO charge $50k a year!

 

Even excluding the fraudsters from the analysis, the bulk of mainstream higher education is overpriced.  Mediocre schools overcharge because they CAN:  the money is there (in the form of credit).  Much like how the housing industry was in a bubble before 2008, because banks and mortgage companies were bending over backwards to dole out the money.  It is public policy to democratize housing ownership and higher education, therefore we have socialized the risk (associated with massively expanding credit) via government sponsorship and backstop of the credit industry.  The results are largely good, since it enables the middle class to own homes and get educated, but it also fosters price inflation, even without fraud.

[Guest roark33]

New article on SA regarding ESI. 

 

I don't know how soon the bankruptcy or equity reorg will take, but I see it as the most likely option also:

 

http://seekingalpha.com/article/3195596-why-itt-educational-services-equity-is-worthless

 

 

[Patmo]

I'm just going to leave this here, hope I'm not the only one on this board who snagged shares at 2.50 and under. Long story short, slam dunk. I bought my first share at $11ps or such, not selling a single one until this first share is a triple. Very happy with the development.

 

http://www.ittesi.com/2015-05-29-ITT-Educational-Services-Inc-Announces-The-Filing-Of-Its-2014-Form-10-K-Reports-2014-Diluted-EPS-Of-1-23-And-Provides-Additional-Updates

 

And my man Modany aka President Spitfire with the red hot diss just for a kicker:

http://www.ittesi.com/2015-05-29-Statement-from-ITT-Technical-Institute-to-Senator-Durbin

 

 

[Patmo]

Does no one want to discuss this? Am I literally the only long on this board?

 

FY15 guidance of 100mil EBITDA suggests a valuation of $35ps at 10x EBITDA, which I may remind you is a sufficiently conservative valuation considering this is bottom of the cycle barrel earnings. The results of measures taken to improve the program offerings will start kicking in in a couple years, ultimately resulting in superior financial performance. 80-100mil steady EBITDA stream until then. SEC fraud lawsuit doesn't have a leg to stand on, and ESI will be taken off cash monitoring once its filings are all current again.

 

The cash flow/forced bankruptcy short thesis is dead in the water for now. You have to believe the DJTDE soapbox gospel that the program improvement measures won't work, enrollments will decline forever and the big bad evil ITT will just roll over without trying for any short thesis to eventually hold up. Given how successfully the cost cutting measures have performed in such short order, I wouldn't bet against if I was a betting man. Which I am. Which is why I put my money where my mouth is  8)

[WideMoat]

Congratulations on your slam dunk.  I'm trying to understand what their cash/liquidity situation will look like at YE 2015.  Student enrollment is down substantially, and almost every spare dollar will go interest on their term loan and its mandatory prepayment. 

 

To hit your EBITDA projections, they will have to cut their 2015 operating expenses 20-25%.

 

---------------

 

"Total student enrollment in education programs as of March 31, 2015 was 51,201, a decrease of 10.4% as compared to 57,125 as of March 31, 2014...

 

New student enrollment in education programs in the three months ended March 31, 2015 was 14,104, a decrease of 15.8% as compared to the same prior year period." (58, 10-k)

 

"The Term Loans will mature on December 4, 2017. The Term Loans bear interest, at our option, at:

 

• the higher of (a) the London Interbank Offered Rate (“LIBOR”) and (b) 1.00%, plus a margin of 8.50%; or

 

• the highest of (a) 2.00%, (b) the federal funds rate plus 0.50%, © LIBOR plus 1.00% and (d) the U.S. Prime Rate, plus a margin of 8.00%.

 

The outstanding principal balance under the Financing Agreement must be repaid by us in quarterly installments on the first business day of each March, June, September and December, commencing March 1, 2015 and ending on the maturity date. Each installment payment must be in an amount equal to $2,500 in each quarter of 2015, $5,000 in each quarter of 2016, and $7,500 in each quarter of 2017, provided the last such installment payment shall be in the amount necessary to repay the then outstanding principal balance in full. In addition, the Financing Agreement provides for mandatory prepayment of outstanding principal in an amount equal to 50% of Excess Cash Flow (as defined in the Financing Agreement) calculated based on our cash flows for the fiscal years ended December 31, 2015 and 2016." (F-35, 10-k)