ITT Educational Services Inc. (ESI), one of the leading providers of technology-based post-secondary degree programs in the U.S., recently delivered third-quarter 2010 results that beat Zacks’ expectations but hinted at a drop in new student enrollments.
The quarterly earnings of $2.82 per share, outpaced the Zacks Consensus Estimate of $2.73, and surged 42.4% from $1.98 earned in the year-ago quarter. ITT Educational reaffirmed its fiscal 2010 earnings guidance range of $11.00 to $11.35 per share.
ITT Educational registered a growth of 17.9% in revenue to $400.6 million compared with $339.6 million in the prior-year quarter. Total revenue, however, fell short of the Zacks Consensus Estimate of $405 million.
The increase in top-line was primarily driven by an 11.1% growth in total enrollment to 88,004 students. The overall rise in enrollment was mainly attributable to a 19.2% jump in continuing enrollment to 61,340 students, partially offset by a 3.9% decline in new enrollments to 26,664 students. Revenue per student tumbled 2.5% to $4,730.
The current potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students’ enrollments and the company’s profits. Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.
The sector bellwether Apollo Group Inc. (APOL) also cautioned that enrollment in its first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment.
ITT Educational, which conducts programs through its ITT Technical Institutes and Daniel Webster Colleges, notified that cost of educational services rose 15.2% to $134.5 million, while student services and administrative expenses climbed 13.1% to $114.7 million. However, the top-line growth more than offset the increase in operating expenses.
Consequently, ITT Educational’s operating income logged a growth of 24.6% to $151.4 million, whereas operating margin expanded 210 basis points to 37.8%.
ITT Educational ended the quarter with cash and cash equivalents of $120 million, long-term debt of $150 million, reflecting a debt-to-capitalization of 51.3%, and shareholders’ equity of $142.3 million. The company generated $116.9 million of cash from operations, incurred capital expenditure of $8.1 million and repurchased 1.8 million of shares for $115 million during the quarter.
Currently, we are Neutral on the stock. ITT Educational holds a Zacks #3 Rank, which translates into a short-term Hold recommendation and correlates with our long-term view.
ITT EDUCATIONAL (ESI): Free Stock Analysis Report
Zacks Investment Research
