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Weak Enrollments Hurt ITT's 4Q

Sarmistha Roy Chowdhury

ITT Educational Services's, Inc.  (ESI) adjusted earnings $1.83 per share came short of both the Zacks Consensus Estimate of $1.89 and the year-ago earnings of $2.87 per share. However, on a GAAP basis, the company reported a loss of 41 cents in fourth-quarter 2012. The weak top line took a toll on the bottom line.

Quarterly revenues totaled $300.8 million, down 18.3% from the prior-year quarter due to weak enrollments. Total revenue also missed the Zacks Consensus Estimate of $314.0 million.

ITT Educational reported total enrollment of 61,059 students for the fourth quarter, down 16.6% year over year. New enrollments also witnessed a drop of 11.4% to 13,398 students in the quarter. The company’s revenue per student declined 1.4% from the prior-year quarter to $4,582.

During the quarter, student persistence rates declined 80 basis points (bps) to 72.6%, since the number of continuing students in the quarter also dipped 18.0%. Student persistence is calculated by dividing the number of continuing students in any academic term by total student enrollment in the immediately preceding academic term.

The company reported operating loss of $16 million in the fourth quarter of 2012, compared to earnings of $126.6 million in the prior-year quarter, due to weak top line and higher bad debt expenses. Operating margin plunged 3,970 bps to 5.3% the quarter.  

Cost of educational services in the fourth quarter of 2012 came in at $129.4 million, down 1.7% y/y, owing to decline in compensation costs. However, as a percentage of revenues, cost of educational services increased 730 bps to 43.0%, owing to a decline in revenues.

Student services and administrative (:SSA) expenses declined 14.1% to $94.6 million in the fourth quarter of 2012. However, as a percentage of revenues, student services and administrative (:SSA) expenses increased 150 bps to 31.4%, owing to lower revenues and higher bad debt expenses. 

Fiscal 2012

ITT Educational Services’ fiscal 2012 adjusted earnings of $8.00 per share lagged the Zacks Consensus Estimate of $8.07 but touched the company’s guidance range of $8.00 to $8.10. Earnings for the quarter dropped from the year-ago level of $11.13 due to lower revenues.

Revenues for full year 2012 totaled $1.29 billion, down 14.2% from the year-ago period due to weak enrollments.

The company had 147 campuses in operation as of Dec 30, 2012. Moreover, the company opened 6 new locations in 2012.

Fiscal 2013 Outlook

For 2013, the company expects EPS in the range of $3.50 - $4.00. The company expects new student enrollment growth in the range of (5.0%) -5%.  

Sluggish macroeconomic conditions and low employment levels have been taking a toll on private education companies by adversely affecting enrollment. As such, most companies are working toward increasing the value of the programs and thus increasing employability of the students. For instance, Universal Technical Institute (UTI), a leading provider of post secondary education in the fields of professional automotive, diesel, collision repair, motorcycle and marine, recently announced Chapparal Honda L&Mc Racing as part of its 2013 MMI Supercross Intern Program, under its Motorcycle Mechanics Institute.

However, ITT Educational Services has been witnessing declining enrollment for past few quarters and despite its several initiatives to revive enrollment growth, its outlook for the upcoming quarters is not very encouraging.

ITT Educational Services carries a Zacks Rank #4 (Sell). However, some other companies in the sector that warrant a look include Lincoln Educational Services Corporation (LINC) and Corinthian Colleges Inc. (COCO), both of which carry a Zacks Rank #2 (Buy)

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