High Bar Set for ITT Educational

ITT Educational Services, Inc. (ESI - Analyst Report) is demonstrating steady revenue growth, primarily through opening new campuses, expanding existing campuses, offering new degree programs, and new student enrollment growth. Though the company reported an outstanding first quarter, higher advertising expenses and the costs incurred from opening new campuses are concerning. The Hold rating is maintained.

The management’s long-term growth strategy for ITT Educational Services includes geographical campus expansion, program diversification, and the introduction of new degree programs. The company is developing and offering new associate and bachelor degree programs of study in both technology and non-technology fields as part of the program diversification strategy.

In addition to increased advertising costs, the company continues to invest heavily in human resources and technology to support the management’s growth initiatives. The new Institutes of ITT Educational Services initially incur losses after opening. Hence, the operating margin is being negatively impacted by the substantial costs associated with opening new campuses.

As part of the credit crunch that arose from the subprime mortgage crisis, particularly in the securitization markets, student lending arrangements have come under scrutiny over the past seven to eight months.

ITT Educational Services is currently selling at 20 times trailing 12-month EPS, reflecting the company’s revenue and earnings growth profile. Revenues have grown at a 13% five-year compound annual growth rate. Over the last few years, the stock has traded in a wide P/E range of 16 to 40. The target price is $90.75, which is an 18 P/E multiple on trailing twelve month earnings.

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