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ITT Educational Down to 52-Week Low, Freezes Tuition

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Shares of ITT Educational Services, Inc. (ESI - Free Report) dropped to a new 52-week low of $1.90 on Jun 7. Shares have been down 16.7% since the company announced its plan to freeze tuition fees on May 25. The company also reported weak first quarter sales and profits and lowered its new enrollment guidance for 2016 on Apr 29.

The education company eventually closed the trading session at $1.94, recording year-to-date decline of 48.3%.

Tuition Freeze to Hurt Revenues

On May 25, ITT Educational Services announced its decision to freeze tuition rates for the sixth consecutive year in order to improve affordability among students.  Starting in 2010, the company has not increased its tuition fee.

In order to improve affordability among students, the education company provides scholarships and grants, which can reduce their overall tuition revenues by about 48%. This allows the students to avoid private loans to finance their education.   

However, the low cost of education does not seem to drive enrollment or revenues in ITT Educational Services.

Weak First Quarter Results

The education company reported earnings per share of 17 cents in the first quarter of 2016, missing the Zacks Consensus Estimate of 19 cents by 10.5%. Moreover, earnings per share decreased 61.4% from 44 cents in the prior-year quarter due to lower revenues and weak margins.

First quarter 2016 revenues fell 16.7% year over year due to a 15.4% decline in enrollment levels. Total enrollment was weak owing to declines in continuing students and new student enrollment.

New enrollment was hurt by the closure of the enrollment process across some of the campus locations and lower conversion rate. Many prospective students, who had enquired about the programs, did not start classes.  Management believes that the lower conversion rate was due to students’ concerns about the cost of post-secondary education and its value amid economic and labor market disruptions. The strategy to freeze tuition rates seems to have been devised from this belief.

Moreover, the company does not expect the enrollment scenario to improve in the rest of 2016. As such, the company lowered its new enrollment guidance. For 2016, the company expects new enrollment to decline in a range 15% to 20%, which is significantly worse than the prior expectation of 12% to 15% decline.

Low enrollment levels, stagnant tuition rates and high scholarships and grants do not indicate healthy outlook for the education company in 2016 and beyond.

To top it all, regulation systems are stringent and ITT Educational Services seems to be caught up in a storm of controversy for a long time now.

ITT Educational Services carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the school industry may also consider American Public Education, Inc. (APEI - Free Report) , Capella Education Co. and Lincoln Educational Services Corporation (LINC - Free Report) . While American Public Education sports a Zacks Rank #1 (Strong Buy), Capella and Lincoln hold a Zacks Rank #2.

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