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Thursday, 26 April 2007
ITT Educational Services (ESI) "Revisiting a Stock Pick"

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I was looking through the list of the top % gainers on the NYSE today and saw that an old favorite of mine, ITT Educational Services (ESI) had made the list, trading at $91.25, up $7.88 or 9.45% today as I write.   I do not own any shares of ESI nor do I have any options on this stock.

I say "revisit" and an "old favorite" because it has been several years since I first reviewed ESI.  This stock was written up early on this blog, when I wrote up ESI on July 17, 2003, when the stock was trading at $36.13.  With the stock currently trading at $93.62 (as I write), this represents a gain of $57.49/share or 159.1% since posting!

Because of the nice move today, and the rest of the information I will review on this entry,

ITT EDUCATIONAL SERVICES (ESI) IS RATED A BUY

What exactly does this company do?

According to the Yahoo "Profile" on ESI, the company

 "...provides postsecondary degree programs in the United States. It offers diploma, associate, bachelor, and master degree programs in the fields of information technology, electronics technology, drafting and design, business, criminal justice, and health sciences."

How did they do in the latest quarterly report?

As I have found myself saying over and over again on the blog, it was the report of 1st quarter 2007 results today before the opening of trading that produced the big price appreciation in the stock! Revenue for the three months ended March 31, 2007, increased 15.8% to $204.2 million from $176.3 million in the same quarter in 2006.  Net income climbed 34.8% from $20.5 million in 2006 to $27.6 million in the latest quarter.  Diluted earnings per share increased even more, up 46.7% from $.45/share to $.66/share in 2007.

As part of this terrific earnings report, the company went ahead and raised guidance for 2007 earnings from $3.17 to $3.21 to the new range of $3.40 to $3.50/share.

The reported earnings beat expectations of $.54/share (they came in at $.66/share) and revenue of $198.4 million (they came in at $204.2 million) per analysts at Thomson Financial.   Thus, the company did what I call the "trifecta-plus", by reporting terrific revenue growth, earnings growth, beating expectations on both, and raising guidance!  As if this wasn't enough, the company added a bit of "icing on the cake" by announcing an increased buyback of shares, adding an additional 5 million shares to its repurchase plans. 

How about longer-term financial results?

Reviewing the Morningstar.com "5-Yr Restated" financials, we can see the steady increase in revenue from $454 million in 2002 to $758 million in 2006.  Earnings have also been steadily increasing from $.94/share in 2002 to $2.33/share in 2005 and $2.72/share in 2006.  The company does not pay a dividend.  However, unlike most stocks I review on this blog, the company has been reducing its outstanding shares, with 46 million reported in 2002, down to 43 million in 2006 and 41 million in the trailing twelve months (TTM).  Whenever a company buys back shares  this serves both to improve financial results, by dividing earnings by a fewer number of shares, as well as directly driving up the price of shares by adding demand to the marketplace. 

Free cash flow has been positive with $107 million in 2004, $133 million in 2005 and $121 million in 2006.

The balance sheet, as reported by Morningstar.com, appears solid with $356.9 million in cash alone, enough to pay off all of the $284.5 million in current liabilities and much of the $171.9 million in long-term liabilities as well.  Combining the cash and other current assets gives us a total of $380.9 million in total current assets, which, when compared to the $284.5 million in current liabilities yields a current ratio of 1.34.  Generally ratios of 1.25 or higher are satisfactory.

What about some valuation numbers?

Checking Yahoo "Key Statistics" on ESI, we find that this is a mid cap stock with a market capitalization of $3.85 billion.  The trailing p/e is a tad rich at 34.55, but the forward p/e of 24.76 is a bit more reasonable (fye 31-Dec-08) as estimated.  The PEG is also reasonable at 1.30 (5 yr expected).

In another assessment of valuation, using the Fidelity.com eresearch website, we can see that the Price/Sales (TTM) is priced a bit richly at 4.63, compared to an industry average of 2.65.  However, the company is far more profitable than its peers, with a Return on Equity (TTM), according to Fidelity, coming in at 89.07% (TTM), compared to an industry average of only 3.52%.  I guess you get what you pay for :).

Finishing up with Yahoo, we find that there are 41.08 million shares outstanding but only 34.27 million that float.  Of these, 1.33 million shares were out short as of 3/12/07, representing a slightly significant 4.4 trading days of volume (the short ratio).   Today's volume of 1.37 million shares thus far may well represent some of the short-sellers feeling the 'squeeze' and scrambling to buy shares to close out their positions.  The normal average trading volume for this stock is only 333.5 thousand shares.

As I noted, the company does not pay a dividend and the last stock split was a 2:1 split back in June 6, 2002.

What does the chart look like?

Examining the "Point & Figure" Chart on ESI from StockCharts.com, we can see that the stock actually traded rather poorly between April, 2003, when the stock was at $27, to a high of $61 in February, 2004, then fell back to the $28 level where it hit twice before moving sharply higher after July, 2004, and moving to its current level of around $93.

 

Summary: What do I think?

I wrote this stock up because I like this stock :).  The company has been a great performer for me even if I don't own the stock.  Their latest quarterly report out today was great.  They reported strong results, beat expectations, raised guidance, and announced an additional stock buyback!  Longer-term, they have been a solid performer fundamentally with steady revenue and earnings growth, free cash flow solidly positive, a reduction in the number of shares outstanding and a solid balance sheet.

Valuation-wise, the p/e is a bit rich as is the Price/sales ratio.  However, the PEG suggests that growth will be sufficient to justifify the p/e, and the return on equity suggests that the incredible profitability of this company may well justify the premium in the price.  Finally the chart looks very strong if a bit over-extended.

Thanks again for dropping by and visiting!  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Podcast Website!

Bob


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