ITT Educational Services (ESI)

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Bulls: Reasons To Buy Feeling Bullish? Be the first to explain why this would make a good investment See all Bears Reasons Bears: Reasons To Sell High exposure to private lenders 100% agree High exposure to private lenders Credit Suisse estimates ITT's exposure to private lending to be around 29% of total revenues. Tighter lending requirements may squeeze prospective students at the lower end of the credit range which may affect new enrollments. Although recent news (Apr.4, 2008)... read more View or Edit Reason 1 votes 100% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Sar Medoff Related Articles Career Education (CECO) Apollo Group (APOL) Credit cycle vs. economic cycle DeVry (DV) Subprime lending

ITT Educational Services (ESI) is the fourth largest for-profit university in the U.S., offering 29 degree programs to approximately 53,000 students, both online and at 97 institutes and 9 learning sites in 34 states. 97% of the company's revenue comes from tuition charges.

ITT Educational Services has traditionally focused on providing technology-related associate degree programs, but has expanded its offering to include an increased number of degree programs outside of technology in addition to a greater number of bachelor's degrees. Bachelors programs generate more revenue than Associate's degree programs because they are often 4-year programs versus 2-year Associate programs, and Bachelor's programs have greater tuition costs. To provide these new services, ITT has opened many new smaller branch campuses and learning sites; in 2007, ITT opened 10 new institutes and plans to open an additional 6-8 in 2008^[1]. In 2007, 73 of its 97 institutes offered bachelors programs and ITT hopes to offer these programs 80 campuses by the end of 2008.

Historically, enrollment at for profit educational institutions has increased during economic downturns as poorer job prospects cause prospective students to view continuing eduction more favorably. During the 2001 recession, enrollment growth at four-year for-profit education institutions doubled, and during the first years of recessions over the last four decades, enrollment growth in two-year education programs has increased by an average of 12% ^[2].

Education's inverse relationship to the greater economy may not hold true in this particular downturn because it was spurred by the mid-2007 credit collapse. The ongoing subprime lending crisis has forced many banks to reexamine and restrict their lending practices. Moreover, in January 2008, Sallie Mae, the largest provider of private student loans, decided to terminate its lending programs with for-profit educational institutions. Private student loans account for 29% of total revenue, nearly double the that of its major competitors (Career Education (CECO) 18%, DeVry (DV) 5%), so any difficulties experienced by students in procuring private loans will have a disproportionate affect on the company. line^[3]. In an effort to mitigate the loss of Sallie Mae loans, ITT signed contracts with three smaller private loans providers.

[edit] Business Financials

In FY 2007, total revenue was $869.5 million, up nearly 15% from $757.8 million in FY 2006. Following this trend, net income for FY 2007 was $151.6 million, an increase of 28% since $118.5 million net income in 2006^[4]. ITT attributes the increases to an 11% increase in total student enrollment, a 5% increase in tuition charges, and improved student retention rates ^[5].

Tuition charges account for 97% of ITT's total revenue, and of this, approximately 63% of total revenue comes from Federal Education Financial Aid Programs that subsidize many students' tuition^[6].

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[edit] Key Trends and Forces

[edit] Increasing Demand Drives Up Enrollment

97% of ITT's revenue comes from tuition. Unlike most of its competitors, ITT's largest student demographic is 20-24 years old (most competitors target students older than 24). The U.S. Department of Education estimates that the post-secondary education market is worth at least $370 billion; and over the next six years, the percentage of 18-24 year old students will increase by 16%^[10]. Because such a large percentage of ITT's revenue comes from tuition, the company's continued success will depend on its ability to recruit and enroll ever-increasing numbers of students. Total enrollment has increased by an average of 9% since 2005^[11].

[edit] Government Regulation and Financial Aid Policies Determine ITT's Fiscal Success

The post-secondary education market is highly regulated for any educational institutions that receive funding from the government; in ITT's case, government funding is in the form of financial aid programs that subsidize qualified students' education costs. Because 63% of ITT's annual revenue comes from Federal Education Financial Aid Programs, any significant change in policy for the various financial aid programs will affect ITT's revenue.

[edit] Credit Crisis

In January 2008, Sallie Mae declared that it will be terminating its loan program within the entire postsecondary education market; this combined with the 2007-2008 credit crunch will make it more difficult for students to find loans to pay tuition.^[12]. In 2007, 29% of ITT's total revenue came from unaffiliated private student loan programs, primarily Sallie Mae. ITT collects a larger percentage of revenue from private student loans than any of its competitors - DeVry 18%, APOL 5%^[13]. In January 2007, Sallie Mae declared that it will be terminating its loan program within the entire postsecondary education market. In 2007, nearly 17% of the loans provided by Sallie Mae were subprime; in effect, 5% of ITT's revenue depends on subprime borrowers repaying their loans. The company has contracted with three other loan providers to help fill the gap and whatever these company's can't cover, ITT will provide loans directly to students^[14]. If credit markets continue to contract and students find it more difficult to obtain outside loans, ESI will have to provide more loans directly to students and increasing the company's exposure to credit markets^[15].

[edit] Competition

The post-secondary education market is extremely competitive and not dominated by any single player. The United States has approximately 6,440 post-secondary education institutions^[16]:

• 2,570 private, for-profit schools
• 2,010 public, non-profit schools
• 1,860 private, non-profit schools

In addition to this extreme market fragmentation, the extensive accreditation process acts as a significant barrier to entry for new companies.

Of the other private, for-profit schools that target non-traditional students, Apollo Group (APOL) , Career Education (CECO), and DeVry University (DV) pose the greatest competition to ITT Educational Services.

Apollo Group (APOL) operates the University of Phoenix, the largest private, for-profit postsecondary education institute. They serve more than 313,700 enrolled students, at 102 campuses and 157 learning centers in forty states. Apollo's total revenue for FY 2007 was $2.72.8 billion.

Career Education Corporation (CECO) operates 80 campuses in the United States, Canada, France, and the United Kingdom, and two online academic programs. Approximately 90,000 students^[17] are enrolled in their programs and their FY 2007 total revenue was $1,675 million^[18].

DeVry (DV) served approximately 108,800 students in 2007 through its four subsidiary institutions - DeVry University, Ross University, Chamberlain College of Nursing, and Becker Professional Review. DeVry University is an undergraduate institution with more than 80 locations and the Keller Graduate School of Management; enrollment in 2007 was approximately 57,000. Ross University operates the Ross University School of Medicine and the Ross University School of Veterinary Medicine in Dominica. Enrollment in 2007 was 3,700. The Chamberlain College of Nursing enrolled nearly 1,100 students in 2007. Becker Professional Review operates CPA and CFA review courses that enrolled more than 47,000 students in 2007. DeVry's total revenue for FY 2007 was $933.5 million.

[edit] Market Share

The National Center for Education Statistics predicted that there would be approximately 2.1 million students enrolled in private, for-profit postsecondary education institutions in the 2006-2007 school year. Using this predicted number of students and enrollment information for ITT Educational Services and its competitors, each institution's market share is listed below.

[edit] Notes

1. ↑ ESI 2007 10-KItem 1: Business, page 8
2. ↑ "School Stocks That Win When Jobs Go Bad," MSN Money - 1/16/2008
3. ↑ "A Second Look at Educational Services and Student Lending Problems," Seeking Alpha - 3/31/2008
4. ↑ ESI 2007 10-KItem 6: Selected Financial Data, page 34
5. ↑ ESI 2007 10-KItem 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 41
6. ↑ ESI 2007 10-KItem 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 35
7. ↑ ESI 2007 10-KItem 6: Selected Financial Data, page 34
8. ↑ ESI 2007 10-K Item 6: Selected Financial Data, page 34
9. ↑ ESI 2007 10-KItem 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 43
10. ↑ APOL 2007 10-K Item 1: Business, page 6
11. ↑ ESI 2007 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 41
12. ↑ "Career Education Shares Drop," MSN Money - 1/11/2008
13. ↑ "A Second Look at Educational Services and Student Lending Problems," Seeking Alpha - 3/31/2008
14. ↑ "ITT Educational Services Offers an Investment for the Future," Seeking Alpha - 2/24/2008
15. ↑ ESI 2007 10-KItem 1A: Risk Factors, page 25
16. ↑ DV 2007 10-K, Item 1: Description of Business, page 12
17. ↑ Career Education Corporation - Main Page
18. ↑ CECO 2007 10-K, Item 6: Selected Financial Data, page 41
19. ↑ ESI 2007 10-K Item 6: Selected Financial Data, page 34
20. ↑ APOL 2007 10-K Item 1: Business, page 4
21. ↑ Career Education Corporation - Main Page
22. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11
23. ↑ ESI 2007 10-K Item 6: Selected Financial Data, page 34
24. ↑ Career Education Corporation - Main Page
25. ↑ APOL 2007 10-K Item 1: Business, page 4
26. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11