1. What do you see as the worst-case scenario for ESI from new regulations?
Tough to say since we don't know what the final regs will include. If the 8% student loan payment to income indicatory is passed, I think it would signficantly impact ESI.
2. The other edu stocks are still selling at steep multiples, which suggests that investors aren't too concerned about new regulations on them. It's hard to imagine that DOE would come up with regulations that would have significant impact on just one company; it would hardly seem to be worth the effort, on a large picture basis. I would be interested to get your thoughts on my assessment.
ESI would be impacted more by the 8% rule because their tuition is one of the most expensive in the industry as compared to the average salary their grads make. One analyst calculated that ESI's Associate grads would need to make at least $44,000 at current tuition rates to stay under the 8% threshold - the average ESI Associate grad is only making $33,000 right now. An ESI Bachelor grad would need to make at least $83,000 to stay under the 8% rule, the average ESI Bachelor grad is only making $42,000 right now. Other schools have lower tuition, their students get more grants (like for nursing or vets) or their grads end up with higher paying jobs. So ESI would be at greater risk of having to cut tuition more or somehow spend more money to get grads better high paying jobs.
3. You mention "other headwinds further down the road," could you be more specific.
The primary headwind I see is slowing growth. Both from an improving employment picture and tougher comps. Even Modany said in the conference call that enrollment growth will drop to the single digits.
4. The premiums on the July options aren't excessively high. The P/E on ESI stock is unusually low. Don't you think investors might have already discounted the worst case scenario?
Again, it's hard to know what the worst case scenario is. It could be that the P/E is so low just because of the uncertainty and ESI will rally regardless of what regs come out.
Your welcome, I try to keep it balanced... rather than some of the garbage posted by Oxledge and others.
I've been in and out the stock - currently long. I also own a July option strangle. I'll do quite well if nothing meaningful comes out of the DOE regs, while I still have some downside protection if the Obama administration decides to get tough. Without meaningful regs, ESI could easily trade north of $180 but I don't view it as a long-term holding as there are other headwinds further down the road.