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ITT Educational Services Inc. Message Board

  • tommyleesd2003 tommyleesd2003 Dec 24, 2012 4:45 PM Flag

    Cash Flows

    I've never wanted to buy any of these for-profit education stocks for various reasons, but this stock recently caught my attention. The entire market valuation of this company is 398 million -- trailing twelve month EBITDA is 422 million (through 9/30/12). After capex (minimal), interest (minimal) and taxes, the company should have over 300 million to spend. ITT could buy back the entire company at current valuations in 1.5 years with internally generated funds...this sounds like a great value opportunity, but the cash currently isn't being generated.

    The cash isn't there. It's this Deferred Revenue and A/R that are uses of cash right now b/c third party student lenders aren't giving cash for these loans right now. I know these student loans aren't attractive, but the high yield corporate debt markets are so hot right now b/c so many investors are chasing yield -- demand is there at the right yield/discount/price. If ITT is quibbling over the discount these private third party lenders are requiring, they need to get over it. Just bite the bullet, ITT, and start generating some cash. Nobody wants ITT to turn into financial company; have third party lenders take care of the financing and realize the cash.

    ITT has historically repurchased shares, but they aren't doing it now b/c they don't have the cash to do it. They have 174 million in cash, but creditors require them to hold at least 125 million. They need to monetize these student loans, and use the cash to repurchase shares b/c the stock valuation right now is absolutely dirt cheap. Market Cap/EBITDA is below 1.0x (this is unheard of!), forward P/E is slightly above 2.0x These for-profit education companies absolutely should be trading at low multiples b/c the growth isn't there (much of the industry is a scam) -- management needs to now focus on creating shareholder value. The opportunity is absolutely there RIGHT NOW.

    This company could generate over 300 million in free cash flow next year and buy back 75% of the company at current valuations. The Board of Directors needs to focus their attention toward generating cash and repurchasing shares if they are truly acting in the interest of shareholders.

    ITT isn't as egregious as other for profits b/c some of their programs are actually in demand by the private sector, but this industry is contracting and will continue to do so. Divert attention to shareholder rewards and this stock will shoot waaaaay higher b/c current valuations are just ridiculous.

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    • You are 100 percent right, but the one thing that is killing this stock is The Obama Administration hates for profit education.
      There are many articles in the web from creditable sites pointing out that Obama wants to further cut for profit education funding.
      The Administration point to a 2010 study that found the for profit education as a whole spent 27 percent of revenue on marketing and recruiting, while just 17 percent of revenue on actual education. As well as high loan default rates. ITT currently has the highest default rate in the industry.
      Add on declining enrollment and revenue along with a industry that has a horrible reputation among students "it's customers" and I think that this stock and the industry still has further to fall.

      • 1 Reply to stocktrader3349
      • The industry is predominantly a scam. You could write a book about all of the headwinds this industry faces. I get all of that, but at some point the stock falls to a level where there is value.

        I don't see how ESI can reasonably go too much lower. The market cap is below TTM EBITDA, Forward P/E is a little above 2.0x. Heck, if you add up the real estate, buildings and cash on the company's 9/30/12 balance sheet, it's 340 million of value, or 85% of the company's current market capitalization. The balance sheet is clean with minimal debt. They could do a sale leaseback transaction tomorrow, get the cash and buy back 20 pct of the company. It'd be easy to do and they're allowed to do up to a 100 million sale leaseback.

        It won't happen, but tomorrow the Board could say, "Screw it. Let's max out our 325 million revolver and use proceeds to buy back half the company." It could do it and still stay in compliance with its leverage covenants.

        Rather than leverage its balance sheet, it's better off to just get a deal with third party lenders, start generating cash and buy back shares. Earnings may be down 20 pct next year, but the company could easily buy back 30-40% the company next year with internally generated cash flows (at current valuations) and have EPS increase substantially just through the reduction in shares outstanding.

        This stock is heavily shorted. Short interest is greater than 50%. I understand the short story, but at these valuations it just doesn't make much sense anymore if the Board is going to act in the interest of shareholders, which it has done before.

        The chart shows some pretty clear support at 17/share, which has been tested numerous times over the last two months. The Board could do the right thing in January and cause a massive short-covering rally.

 
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