ESI Beats, Raises Lower-End Outlook

ITT Educational Services Inc. (ESI - Snapshot Report), one of the leading providers of technology-based post-secondary degree programs in the U.S., recently delivered second-quarter 2011 results that beat the Zacks' expectation.

The quarterly earnings of $2.85 per share outpaced the Zacks Consensus Estimate of $2.64, and rose 2.5% from $2.78 per share earned in the year-ago quarter.

ITT Educational registered a decline of 3.5% in revenue to $387.9 million compared with $401.8 million in the prior-year quarter. However, total revenue beats the Zacks Consensus Estimate of $378.0 million.

In the second quarter, the company witnessed a 7% decline in total enrollment to 78,743 students compared with 84,695 students in the prior-year period. The overall decline in enrollment was mainly attributable to a 19.9% drop in new enrollments to 17,351 students compared with 21,673 students in the prior-year period. Revenue per student inched down 2.9% to $4,616.

ITT Educational reported a year-over-year decline in the number of probable students interested in the company's study programs in the second quarter of 2011, primarily due to a shift in the media mix. However, inquiries transformed into application increased during the quarter.

The potential risk presently looming over the education sector is the uncertainty over the Pell Grant program. The U.S. Senate has passed a resolution to cut $38.5 billion from the federal budget in fiscal 2011.

However, the Obama administration has maintained the maximum amount for Pell Grants at $5,550 per student for 2011-12 academic year. That said, the federal budget cut may have an impact on the number of student getting Pell Grant approval from the Department of Education.

However, ITT Educational in its first-quarter 2011 earnings call conference has revealed that the recent federal budget cut will not have a significant impact on the company's cash flows until 2013. But, whenever it does, it will be in the range of $20.0 million to $30.0 million.

ITT Educational, which conducts programs through its ITT Technical Institutes and Daniel Webster Colleges, notified that the cost of educational services rose 6.4% to $142.3 million, and student services and administrative expenses inched up 4.2% to $115.6 million.

Consequently, ITT Educational's operating income of $130.0 million, logged a decline of 17.3%. Moreover, operating margin contracted 560 basis points to 33.5% in the quarter.

ITT Educational ended the quarter with cash and cash equivalents of $158.2 million, long-term debt of $150.0 million, and shareholders' equity of $86.5 million. The company generated $60.6 million of cash from operations, incurred capital expenditure of $7.5 million and repurchased $79.4 million worth of shares during the period.

Management now expects fiscal 2011 earnings to be in the range of $10.00 to $10.50 per share compared with $8.50 to $10.50 forecasted earlier. The current Zacks Consensus Estimate of $10.21 lies within the company's guidance range.

Moreover, the company has planned to begin its operations at 7 to 9 new locations during the remainder of current fiscal year. Currently, ITT Educational operates through 131 campuses and 4 learning sites.

The company's nearest competitor Apollo Group Inc. (APOL - Analyst Report) recently reported its third-quarter 2011 earnings per share of $1.45, declining 16.7% from the prior-period earnings of $1.74. However, earnings surpassed the Zacks Consensus Estimate of $1.34 a share.

Currently, we have a long-term Neutral rating on the stock. ITT Educational holds a Zacks #3 Rank, which translates into a short-term Hold recommendation that correlates with our long-term view.

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