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On Jun 11, Zacks Investment Research downgraded ITT Educational Services Inc. (ESI - Snapshot Report) to a Zacks Rank #5 (Strong Sell)

Estimates for this education company declined sharply in response to the withdrawal of its previously provided guidance for 2014 on May 22.  In fact, shares have dipped 10.7% since this announcement.  

Why the Downgrade?

In March this year,, ITT Educational submitted an enquiry to the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission (SEC) related to the accounting treatment of the PEAK Private Student Loan Program in the company’s financial statements. However, on May 22, the company announced that it is yet to receive any response from the authority and therefore finalization of its financial statements for fourth quarter 2013 and first quarter 2014 remains pending.

As a result, the company has not yet filed an annual report for its fourth quarter 2013 and the 10Q report for the first quarter of 2014. The company withdrew the previous guidance for fiscal 2014 and expects to provide the same once it completes the financial statements for the said quarters.

Also, management warned that owing to the pending response from OCA, some of the data in the fourth quarter press release issued Jan 30, 2014 should be treated as preliminary and is subject to change.

A number of law firms including Rosen Law Firm, P.A., Levi & Korsinsky, and Law Offices of Howard G. Smith have begun investigating potential claims against ITT Educational. The firms will inspect whether the company has violated any of the federal securities laws or has provided inaccurate statements regarding its true financial position.  

At the May 22 conference call, ITT Educational also announced that total enrollments for the first quarter declined 6.4% year over year. In addition, new enrollments witnessed a decrease of 3.8% due to unfavorable weather and lower number of prospective students in the quarter. New enrollment was down owing to a decline in enrollment in drafting and design (down 15.6%), electronics engineering (down 0.4%) and criminal justice (down 49.3%) programs.

Further, student persistence rates declined 130 basis points (bps) to 70.2% in the quarter due to a 7.4% dip in the number of continuing students.

Further, ITT Educational also warned that second quarter new student enrollments could decline year over year in the range of 10% to 15%.   

However, not all education stocks are performing as poorly as ITT Educational. Better-ranked education companies that warrant investor attention include Lincoln Educational Services Corp. (LINC - Snapshot Report), DeVry Education Group Inc. (DV - Analyst Report) and Grand Canyon Education, Inc. (LOPE - Snapshot Report). While Lincoln Educational sports a Zacks Rank #1 (Strong Buy), DeVry and Grand Canyon carry a Zacks Rank #2 (Buy).
 

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