Strategic Financial Analysis- Itt Educational

Strategic Financial Analysis- ITT Educational Services Inc. (ESI)

Strategic Financial Analysis -- ITT Educational Services Inc. (ESI): A Venture Capitalist Analysis

The education and training services industry in the United States today represents a major opportunity for venture capitalists seeking to capitalize on the current trend in the manner in which educational services are being delivered, particularly to adult learners. One of the current leaders in this industry is ITT Educational Services, Inc., a private college system that offers various technology-oriented programs of study. The company operates more than 75 ITT Technical Institutes in 30 states, providing approximately 40,000 adult learners with career-focused, degree programs. Further, the company has been in the business for a comparatively long time, having been actively involved in the higher education community in the United States since 1969. This company would appear to represent a highly attractive investment opportunity, but the prudent venture capitalist will seek to determine as much relevant and timely information as possible concerning the financial performance of the enterprise, which is the purpose of this study. The study uses a review of the peer-reviewed and scholarly literature, together with current periodicals and reliable organizational online resources, to develop a snapshot view of ITT Educational Services, Inc. today.

Strategic Financial Analysis -- ITT Educational Services Inc. (ESI): A Venture Capitalist Analysis

1.0

Executive Summary

1.1

Company Description. Just a decade ago, many of the companies at the time that are now household names in the "education industry" were virtually unknown by the American public. In January 1996, the "education industry" was created overnight in the form of a news report in the New York Times that officially placed these companies on the map; these companies included Sylvan Learning Systems, DeVry Institute, ITT Educational Services, Inc., and KinderCare (Garber & Steiger, 1996).

Today, ITT Educational Services, Inc. (hereinafter alternatively "the company" or "ITT") provides technology-oriented postsecondary degree programs in the United States. The company provides associate, bachelor and master degree programs, and non-degree diploma programs to adult learners. As of December 31, 2004, the company had 77 institutes located in 30 states that served approximately 44,000 students. As of that date, the company offered 17 degree programs and diploma programs in various fields of study, including information technology, electronics technology, drafting and design, business, and criminal justice. The company was incorporated in 1946 and is currently headquartered in Carmel, Indiana (Company profile, 2005, p. 1).

1.2

Industry. The company competes in the Education & Training Services Industry; besides education management groups such as ITT, the education industry also includes sectors such as educational services (learning centers, test-preparation companies) and educational products (textbooks, software) (Garber & Steiger, 1996).

1.3

Company's position in the industry. According to Morey (2001), over the past decade or so, the emergence of for-profit, degree-granting, accredited institutions of higher education has the potential of providing real competition and altering some segments of nonprofit higher education; in fact, within a period of just about five years, postsecondary proprietary education transformed itself from a small sector of the economy mainly offering specialized trade training to a $3.5 billion a year business that is dominated by companies building regional and national franchises (Morey, 2001).

This author reports that some of the historical major competitors in the education and training services industry are:

1.

The Apollo Group (www.apollogrp.com). This company offers certificate programs as well as associate's, bachelor's, master's, and doctoral degrees through its subsidiaries);

2.

The University of Phoenix, Inc. (UOP).

3.

The Institute for Professional Development;

4.

The College of Financial Planning Institutes Corporation;

5.

6.

Apollo Learning Group, Inc. Currently, Apollo offers educational programs and services at 55 campuses and 98 learning centers in 35 states, Puerto Rico, and Vancouver, Canada; the school's combined degree enrollment is approximately 104,000 students;

7.

DeVry (www.devry.edu). This company specializes in business and technical education and has more than 40,000 students in business and technology at sites in the United States and Canada; and,

8.

ITT Educational Services (www.itttech.edu). Today, ITT operates more than 78 technical institutes, enrolling more than 25,000 students seeking associate's and bachelors degrees in technology fields (Morey, 2001).

In fact, U.S. Department of Education statistics indicate that all of the ITT Technical Institutes combined granted the largest percentage (14.7%) of the total number of associate and bachelor degrees awarded in the U.S. In electronics and electronics-related programs in the 2000-2001 school year (the latest year for which statistics are available); in addition, all of the ITT Technical Institutes combined granted the largest share (22.6%) of the total number of associate's and bachelor's degrees awarded in the U.S. In drafting programs during the same period. The company has also been more successful at attracting, and graduating, higher percentages of black men than not-for-profit colleges and universities in recent years (Coffee, 2004). Not surprisingly, then, today, ITT is among the top five companies in the Education & Training Services Industry.

1.4

Summary of recommendations. The company is faced with some tough challenges in the months ahead, not the least of which are ongoing investigations by the Department of Justice and the Securities and Exchange Commission; nevertheless, based on the company's historic financial performance as well as its lengthy experience in the Education & Training Services Industry, ITT appears to represent a viable investment opportunity for the savvy venture capitalist today.

2.0 Situational Analysis

2.1 Historic Financial performance (past 5 years to date)

Figure 1. Stock Performance: ITT Educational Services, Inc. (ESI) versus Dow Jones, S& P. 500 and NASDAQ -- Past Five Years to Date.

Source: Yahoo! Finance, 2005.

2.1.1

Table 1 -- Revenues. The company's Annual Report dated March 15, 2005, notes that ITT earns almost all of its revenues from tuition, tool kits, fees and charges paid by, or on behalf of, our students.

Table 1. Total Revenues: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Period Ending

31-Dec-04

31-Dec-03

31-Dec-02

Total Revenue

617,834

522,856

464,946

Cost of Revenue

298,747

280,006

267,503

Gross Profit

319,087

242,850

197,443

Source: Yahoo! Finance, 2005.

Figure 2. Total Revenues: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Source: Yahoo! Finance, 2005.

2.1.2

Table 2 -- Operating Income.

Table 2. Operating Income: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Period Ending

31-Dec-04

31-Dec-03

31-Dec-02

Income from Continuing Operations

Total Other Income/Expenses Net

3,834

1,995

2,684

Earnings Before Interest And Taxes

123,382

96,516

70,993

Interest Expense

Income Before Tax

123,382

96,516

70,993

Income Tax Expense

48,119

37,658

27,139

Minority Interest

Net Income From Continuing Ops

75,263

58,858

43,854

Non-recurring Events

Discontinued Operations

Extraordinary Items

Effect Of Accounting Changes

Other Items

Net Income

75,263

58,858

43,854

Preferred Stock And Other Adjustments

Net Income Applicable To Common Shares

$75,263

$58,858

$43,854

Source: Yahoo! Finance, 2005.

2.1.3

Earnings per share.

Table 3. Earnings History -- ITT: September 2004 -- June 2005.

Earnings History

Dec-04

Jun-05

EPS Est

0.46

0.67

0.40

0.46

EPS Actual

0.52

0.72

0.42

0.48

Difference

0.06

0.05

0.02

0.02

Surprise %

13.0%

7.5%

5.0%

4.3%

Source: Yahoo! Finance, 2005.

2.2

Historic comparison of Company ratios to Industry Average.

Figure 3. Historic comparison of Company ratios to Industry Average (latest data available)

Source: Yahoo! Finance, 2005.

2.3

Financial market position.

Growth Estimates

Industry

Current Qtr.

17.3%

14.1%

Next Qtr.

12.5%

14.7%

This Year

20.2%

12.9%

Next Year

16.4%

15.9%

Past 5 Years (per annum)

30.3%

N/A

Next 5 Years (per annum)

20.0%

14.67%

Price/Earnings (avg. For comparison categories)

20.6

18.64

PEG Ratio (avg. For comparison categories)

1.03

1.27

Source: Yahoo! Finance, 2005.

2.3.1 Market Cap.

Table 3. Top Five Education & Training Services Companies by Market Cap (as of October 20, 2005).

Company

Symbol

Price

Market Cap

P/E

Apollo Group Inc.

APOL

60.70

10.96B

25.39

Career Education Corp.

CECO

34.60

3.56B

17.06

Laureate Education Inc.

LAUR

47.81

2.38B

36.44

Education Management Corporation

EDMC

30.63

2.30B

22.66

ITT Educational Services Inc.

48.91

2.26B

25.62

Source: Yahoo! Finance, 2005.

Figure 3. Top Five Education & Training Services Companies by Market Cap (as of October 20, 2005).

Source: Based on data in Yahoo! Finance, 2005.

2.3.2 Institutional ownership.

Table 4. Major Holders of ITT as of October 20, 2005.

% of Shares Held by All Insider and 5% Owners:

9%

% of Shares Held by Institutional & Mutual Fund Owners:

% of Float Held by Institutional & Mutual Fund Owners:

Number of Institutions Holding Shares:

Source: Yahoo! Finance, 2005.

2.3.3 Insider Ownership.

Table 5. Major Direct Holders (Forms 3 & 4).

Holder

Shares

Reported

Blum Capital Partners, L.P.

860,600

17-Oct-05

Araskog, Rand V.

207,108

1-Jul-05

Champagne, Rene R.

101,188

5-Nov-03

Lauer, Thomas W.

19,006

2-Feb-04

Dean, John E.

16,209

1-Jul-05

Source: Yahoo! Finance, 2005.

2.3.4 Share volume.

Table 6. Share volume.

Open

High

Low

Close

Volume

Adj Close*

19-Oct-05

48.01

49.02

47.48

48.91

179,500

48.91

Source: Yahoo! Finance, 2005.

2.4

Financial strengths and weaknesses.

24.1

Strengths. Notwithstanding the ongoing SEC and Department of Justice investigations, ITT remains financially solid and appears to represent a viable investment opportunity. In fact, as recently as October 11, 2005, Tim Beyers of the Motley Fool pointed to the 38% increase in the closing price of ITT's stock from a year ago at the same time, and suggested that the company is "worthy of further investigation" (Beyers, 2005, p. 4).

2.4.2

Weaknesses. Although Apollo has not fared well in recent months, ITT's competitors continue to represent a major threat to the company's efforts to capture additional market share in this dynamic industry; the company's initiatives to attract increasing numbers of minority students, though, together with its emphasis on developing new degree programs that reflect current market demand may serve to offset this increased competition.

2.5

Critical Issues. The most critical issues facing the company today are the pending investigations by the SEC and the Department of Justice (see further discussion in 4.0 Business Risk Assessment below).

3.0

Business Leverage

3.1

Operating leverage. In terms of operating leverage, ITT is in an excellent position to take advantage of its innovative degree programs by expanding its online presence in other countries and developing an English as a Second Language (ESL) component for this purpose.

3.2

Financial leverage. The company continues to enjoy a healthy financial picture, again, notwithstanding the potential implications represented by adverse outcomes in the pending investigations; however, the company's revenues vary based on the aggregate student population, which is influenced by the following factors: a) the number of students attending our institutes at the beginning of a fiscal period; b) the number of new first-time students entering and former students re-entering our institutes during a fiscal period; c) student retention rates; and d) general economic conditions (ITT Annual Report, 2005, p. 1).

3.3

Opportunity and risk of Business leverage. The company has already invested heavily in developing a national infrastructure comprised of hybrid learning centers that are able to accommodate the specific regional needs of its students. This approach appears to represent an edge over its competition, and makes the company all the more worthy of formal consideration for investment purposes. According to the company's Form 10-Q from July 29, 2005, ITT intends to continue expanding by: a) opening new institutes; b) adding learning sites to existing institutes; c) offering a broader range of technology and non-technology programs both in residence on campus and online at our existing institutes; d) increasing the number of our institutes that offer bachelor degree programs; and e) pursuing new and expanded alliances with both domestic and international educators. In addition, "We also intend to further expand our Hybrid Delivery Model by teaching more of the courses in each of our programs online over the Internet" (Form 10-Q, 2005, p. 3).

4.0

Business Risk Assessment.

According to the company's Form 10-Q filed with the Securities and Exchange Commission (SEC) on April 26, 2005, ITT has an ongoing Department of Justice investigation that could result in monetary fines or penalties or other sanctions, including the loss of eligibility to participate in student financial aid programs, that could materially adversely affect the company's financial condition and operations. Furthermore, the results of the SEC inquiry into the allegations being investigated by the DOJ could result in the restatement of ITT's financial statements, monetary fines or penalties or other sanctions that could materially adversely affect their financial condition and operations. Finally, the outcome of a securities class action, shareholder derivative and books and records inspection lawsuits filed against ITT, if adversely decided, could have a material adverse effect on the company's financial condition and results of operations (Form 10-Q for ITT Educational Services, Inc., 2005).