Description:
ITT Educational Services Inc. (ITT) provides technology-oriented post-secondary undergraduate and graduate degree programs in the United States. These are directly relevant to strong employment fields such as business, electronics, industrial design, telecommunications, and computer engineering/protection. It operates more than 140 ITT Technical Institutes in 39 different states.
In 2014, ITT entered into negotiations with College Portfolio Buyers LLC (CPB) to sell a number of its properties for approximately $119 million although this has not yet been finalized. ITT will continue to lease these properties to maintain the services it provides to its students but hopes to eventually phase out 7 identified underperforming campuses.
The Consumer Financial Protection Bureau (CFPB) has recently alleged that ITT engaged in illegal activities in offering high-interest rate loans through the PEAKs Trust to students that have shown to be likely to default. Combining this with a slump in earnings has led to the fall in its stock price.
Recently, ITT has begun to cut prices of current programs and offered over $170 million worth of scholarships in 2013. ITT has also reduced the net cost of its associate degree program to within a range of $20 000 to $25 000 which also covers many items such as books and course materials. This is something that traditional institutions don't offer. Approximately 70% of ITT's employable graduates obtained employment in 2013, using knowledge and skills taught in their program of study. The average annual salary reported by students entering one of ITT's programs increased from $17 000 prior to entering to $33 000 after graduating.
Catalyst(s):
Increasing enrollment trends among ITT's numerous information technology programs have been overshadowed by more rapid declines within its criminal justice programs. As ITT 'teaches out' these programs and begins focusing more on the business and IT sector, it is likely to see revenues return to historical levels.
The case the CFPB makes has been described as "flawed" and "unconstitutional" by not just ITT, but also Morgan Drexen, a company that delivers support services to American law firms which has also been targeted by the CFPB in recent years. They have both filed for a dismissal given the lack of power the CFPB has been proven to have with regards to enforcing credit regulations. Additionally, in 2013 ITT offered more than $170 million worth of scholarships, thus reducing the number of current students requiring financing to less than 0.1%, and severely hurting the CFPB's case against ITT. Additional revenues coming as the result of ITT's sale of assets to CPB will also offer a substantial buffer against any unfavorable settlements with the CFPB.
There is also a high option value associated with a stock that trades at less than 3.0x 2014 estimated EBITDA.
It is also my belief that the underlying programs (specifically IT) offered at the schools have increasing value in the marketplace given the strong trend towards the expansion of the technology sector. Additionally, ITT's new pricing strategy, though still nascent, appears to be generating enrollment growth.
A valuation range of $49 to $53 is derived by applying an EV/EBITDA multiple range of 5.5x to 6.0x to my 2015 estimate. These multiples are derived from the mean of the players within the vocational education industry and reflect risks associated with both ITT's new pricing strategy and those associated with potential asset impairments.
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