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ITT Educational Services Inc. Message Board

  • playingtheturns playingtheturns Sep 1, 2008 11:39 AM Flag

    Advising against a Short position and a note to the company's Board and Executives

    ITT is the lowest priced stock in its industry as measured by P/E. Significantly lower. And ITT aggressively supports its own stock price. Take a look at the balance sheet and the Treasury Stock line. No, ITT is not a great short play, IMO.

    In my opinion, ITT is a company that should be encouraged towards a higher goal than growing the top line. Personally, I would encourage investment combined with shareholder activism. This country needs the kind of education ITT says it is providing.

    ITT should be encouraged to adopt a corporate philosophy that accompanies relatively low admission standards with reasonable cost and the highest GRADUATION standards in the industry, standards that employers can rely upon and accordingly, give graduates a competitive advantage in the job market. This approach could make ITT one of the top investments on the board, and propel its P/E into the 30 or above range of its publicly held competitors.

    Right now, I think ITT might be at the low end in terms of public credibility, which might account for ITT’s P/E, which is less than half of the average company in their own industry, based on Yahoo's competitor data. What appears to me to be missing is corporate concern about the things that really matter when you are building an excellent company.

    The aggressive marketing approach will have to change. Better teachers, tougher exams, better graduates, and industry leading employment statistics will propel ITT into industry leadership, setting standards of excellence that become the industry standard. In my opinion, this approach would be the best long-term strategy to employ, based upon my own analysis of the company’s situation, and the obvious intuitive fact that the industry is becoming increasingly competitive. It is nothing less than foolish for ITT’s executives to believe that tuition rates can continue to appreciate the way they have in recent years, or that the number of locations can continue to grow at rapidly. I also believe that ITT cannot expand internationally given its dependence on Nellie and Fannie student loans, so consequently I do not see a real possibility that ITT’s future growth will be fueled primarily by marketing aggressiveness. At some point, excellence has to be the primary factor that drives students into the school. The real opportunity is to compete not only for the lower level students, but also for the highest. Let everyone in the door, yes. But give them an education that is second to none, with tests and grades that mean something. Give students an institution whose certifications and degrees mean something where it matters, in the job market, and in the competition for graduate schools. Could ITT, with its public corporate framework be the best college in the nation in terms of value (employability/credit $)? Absolutely! But only if the board values its commitment to its students as highly as it values its obligation to its shareholders. However, approached soundly, these two values should be complimentary rather than competing.

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    • Regarding A/R and cash flow, this rest of this post comes directly from the company's 6/30/08 10Q:

      Operations. Cash used in operating activities was $48.0 million in the three months ended June 30, 2008 compared to cash generated from operating activities of $14.7 million in the three months ended June 30, 2007. The $62.7 million decrease in operating cash flow was primarily due to:


      ·a decrease in funds received from private education loans made to our students by third-party lenders;

      ·delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems; and
      ·higher income tax payments primarily resulting from lower tax benefits from the exercise of stock options.



      The decrease in operating cash flow was partially offset by an increase in operating income.


      Cash from operating activities decreased $28.0 million to $31.0 million in the six months ended June 30, 2008 compared to $59.0 million in the six months ended June 30, 2007, primarily due to:


      · a decrease in funds received from private education loans made to our students by third-party lenders;

      ·delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems; and
      ·higher income tax payments primarily resulting from lower tax benefits from the exercise of stock options.



      The decrease in cash from operating activities was partially offset by an increase in operating income and the timing of payroll payments. See “—Student Financing Update” below for a discussion of the impact on our liquidity and cash flows from operations as a result of increases in internally funded student financing.


      Accounts receivable less allowance for doubtful accounts was $29.2 million as of June 30, 2008 compared to $9.9 million as of June 30, 2007. Days sales outstanding was 10.8 days at June 30, 2008 and 4.2 days at June 30, 2007. Both increases were primarily due to increases in internally funded student financing and delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems. We believe that our days sales outstanding could increase further during the remainder of 2008, primarily due to increases in internally funded student financing.


      In May 2008, the U.S. Congress enacted the Ensuring Continued Access to Student Loans Act of 2008 (the “Continued Access Act”) which, among other things, increased the annual and total amount of certain loans that students can receive under the Title IV Programs. We believe that the increase in certain Title IV Program loan funds under the Continued Access Act will result in a reduction in individual balances of the accounts receivable owed to us by our students in the remainder of 2008.

    • aaatiles,

      I'm not grinding the ax here, on either side, but I thought I should point out that your A/R numbers aren't quite right. Your numberers done't seem to come from the SEC filings on Edgar, but from Yahoo. The yarhoo numbers incorrectly combine A/R with a current deferred tax asset. Anyway, A/R as of 6/30/08 as reported in the 10Q amounted to $29,198,000 -- still a very material increase over the $9,930,000 year over year A/R balance as of 6/30/07. So your point is still valid.

      It is interesting to see the deferred tax assets on ITT's balance sheet - a total of $22,594,000 including $11,776,000 current. Deferred tax reporting is complex. Basically, a deferred tax asset means that the company's tax returns include higher net income than the company's GAAP financial statemements. The reason for this in ESI's case is that GAAP requires certain stock options to be expensed currently (for example, on the grant date), whereas tax regs require such stock options to be expensed at a later date (for example, on the date of exercise).

    • Egg, you should have stayed on the boat. While you make a gradual "killing" by buying, I can trade ESI short or long and make money both ways, which is what I have been doing, but with a downward long-term view.

      The Company has already stated in BOTH quarterly statements that it is internally funding revenue due to Sallie Mae no longer lending and no replacement yet AND that trend is expected to continue and increase. NO ONE is lending to sub-prime students, auto purchasers or home buyers! Period. Perhaps you should read the fine print in the quarterly statements again. They are at www.sec.gov [Edgar reports]. As you can see from the second quarter financial statement, receivables almost doubled from something like $40 million from $23 million. That is the part that the Company has fronted the student and now has to collect. Expect that to keep increasing and the collection rate to keep decreasing. THAT is going to impact cash flow. You can't say that cash flow was affected in the second quarter 2008 from treasury share buybacks because ESI hasn't bought any shares since February because as I have mentioned, their available cash has been shrinking. Remember, they have to keep $157 million available as collateral for their $150 million loan. Above that is just enough to manage the cash flow streams from incoming revenue, which comes in spurts, and the cash outflows, which are more regular, like rents, salaries, etc. Consequently, the decrease in cash is NOT the result of share buybacks, but from operations and the internal funding of revenue. It is not I who is misunderstood, it is you.

    • I have to say that sitting here this morning, I think what ITT could accomplish is amazing. What an powerful position its executives and board members occupy. They actually could do more for their fellow Americans than anyone in this nation. They could provide superior educational value. Real value. Real competitive advantage. They could be revered and celebrated as champions of the American dream. Or… they could continue to take pride in the bottom line and enrollment statistics, and continue to pretend they don’t know that a company they are directly responsible for is intrusive and even disturbing in its telemarketing tactics.

      … But keeping to the high road, I submit that this new ITT strategy should be about quantifiable educational excellence as measured by the preparedness of graduates. Even in a publicly held corporation, does an educational institution have to be primarily about financial results? Aren’t the education results the truly important issue? And haven’t these been increasingly ignored in the quest for shareholder value? Isn’t this self-serving approach in direct conflict with the company’s obligation to its students?

      ITT's telemarketing unit in California pissed me off to a level beyond anything I have ever personally experienced. And I am still pissed off. And there is a great deal I could do legally to exact revenge, including bringing the company’s institutional investors into a public debate about the issues raised above. How? Well, you have no idea, and I’ll keep in that way for the moment. However, I realize that discrediting ITT would mean discrediting the education of hundreds of thousands of graduates and current students, and I'm not going to do that. Instead, what I am going to try to do is encourage ITT towards the same standards of corporate excellence that I encourage companies to on a daily basis.

      Finally:

      To the executives and board of directors of the company, I would say: Straighten out your telemarketing procedures. You should create and implement a system that:

      1. doesn't permit telemarketers employed or retained by ITT to:

      a. make any calls to anyone on a national or state do not call list

      b. call anyone a second time without the specific authorization of a supervisor.

      c. never call anyone who has called ITT to register a complaint about prior calls, and who was then advised he would never be called again

      d. never call anyone after 9:00 PM (a federal law, by the way).

      e. assures that employees or agents who violate any such policies are promptly fired.

      (also by the way, I have personally experienced each of the four violations mentioned above, and in the past two months)

      2....
      ...well, I could continue, but I'm sure you get the picture. Do something about it. Immediately.
      I would add that if the telemarketing activities I have personally experienced are part of an intentionally developed enrollment strategy, you are in fact a company with very, very fallible leadership. Any institution that would permit its employees or agents to admit a student that could be harassed into enrollment would have to be assumed to be managed by pathetically short-sighted, ignorant, socially irresponsible people.

      This is my last post until such time as I determine that the company has not taken initiatives to move in the directions suggested above. In the meantime, I will become a shareholder, and will increasingly put myself in a position to be well informed about these matters.


      Making ITT great is not about top line growth. Top line growth is all about making ITT great.

      So Make ITT great. Bring honor to yourselves and your graduates.

 
ESI
9.00+0.55(+6.51%)Dec 18 4:02 PMEST

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