Shares of ITT Educational Services, Inc. ESI plunged around 31% on Jul 30, as the education company reported disappointing second-quarter 2015 results and provided a bleak outlook for this year. The company expects a worse-than-previously-projected decline in new student enrollment in 2015.
Quarter Details
ITT Educational Services’ earnings per share of 3 cents in the second quarter of 2015 missed the Zacks Consensus Estimate of 12 cents by 75%. However, earnings per share increased 50% year over year from 2 cents in the prior-year quarter as higher operating margins offset a year over year decline in revenues.
The company reported revenues of $214.2 million, which surpassed the Zacks Consensus Estimate of $212 million by 1%. Revenues, however, slipped 10% year over year in the quarter due to decline in enrollment levels.
Total enrollment of 47,874 students was down 13.7% year over year, owing to decline in continuing students, new student enrollment and persistence rate. New enrollment of 12,638 students declined 18.6% year over year, wider than the company’s expected decline in the range of 14% and 18%. Continuing students declined 11.8% year over year during the quarter. Persistence rate of 68.8% declined 120 basis points during the quarter.
Operating margin increased 250 basis points (bps) to 5.4%. As a percentage of revenue, bad debt expense improved 170 bps to 4.1% during the year.
Financial Details
ITT Educational Services also updated details regarding its payments toward two private educational student loan programs – PEAKS Trust Student Loans (PEAKS) and CUSO Student Loans (CUSO).
ITT Educational Services revealed the aggregate payments that are expected to be made under the PEAKS and CUSO programs. The company expects to pay $43.9 million in 2015, $27.0 million in 2016, $16.2 million in 2017, and $84.6 million in 2018 and later.
ITT Educational Services has been facing trouble filing its earnings since the fourth quarter of 2013 owing to uncertainty related to the accounting treatment of the PEAK Private Student Loan Program and CUSO program in the company’s financial statements. These loans have created a lot of unwanted controversies in the past, which finally ended with the SEC pressing fraud charges against ITT Educational Services and two of its executives in May 2015. SEC claimed that the post-secondary education company concealed its actual financial status from its investors, particularly in relation with the abovementioned student loan programs.
However, ITT Educational Services seems to be sorting out its issues and finally completed filling with the SEC for all previous quarters by mid-Jun 2015.
Outlook
The company expects new student enrollment for full-year 2015 to decline between 15% and 18% year over year, worse than the prior expectation of 10% to 15% decline. Adjusted earnings before interest, taxes, appreciation and amortization (EBITDA) for fiscal 2015 are expected to range between $90 million and $110 million.
Another education company Capella Education Company CPLA expects soft new enrollment levels in the upcoming quarters of 2015. Headwinds such as reluctance of students to take loans, sluggish demand and an overall difficult discretionary spending environment are hurting enrollment levels.
ITT Educational Services has a Zacks Rank #2 (Buy).
Other Stocks to Consider
Other favorably ranked stocks in the education industry include New Oriental Education & Technology Group Inc. EDU and Universal Technical Institute, Inc. UTI, all carrying a Zacks Rank #2.
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