ITT Educational Services, Inc. is a leading provider of technology-oriented postsecondary degree programs. ESI operates more than 105 Technical Institutes in 37 states, which predominantly provide career-focused degree programs of study in fields involving technology to approximately 65,000 students. ESI has been actively involved in the higher education community in the United States since 1969. Shares are traded on the New York Stock Exchange under the symbol "ESI."
October 26, 2009 - $99.15
52-week range: $65.31 - $133.75
Since their IPO in June 1968 at a split-adjusted $2.50 /share ESI has done little to disappoint its investors. Year after year they have posted higher sales and earnings with the stock price reflecting the great numbers.
Here are ESI’s per share numbers from continuing operations as reported by Value Line:
|
Year |
Sales |
C/F |
EPS |
Avg. P/E |
Y.E. Close |
|
1999 |
6.43 |
0.72 |
0.48 |
25.9x |
$7.72 |
|
2000 |
7.40 |
0.89 |
0.57 |
16.1x |
$11.00 |
|
2001 |
8.86 |
1.13 |
0.72 |
24.1x |
$18.43 |
|
2002 |
10.31 |
1.44 |
0.94 |
22.4x |
$23.55 |
|
2003 |
11.51 |
1.76 |
1.27 |
28.6x |
$46.97 |
|
2004 |
13.43 |
2.37 |
1.94 |
20.8x |
$47.55 |
|
2005 |
15.06 |
2.81 |
2.34 |
21.6x |
$59.11 |
|
2006 |
18.46 |
3.42 |
2.72 |
23.9x |
$66.37 |
|
2007 |
21.91 |
4.40 |
3.71 |
27.4x |
$85.27 |
|
2008 |
26.22 |
5.82 |
5.17 |
14.8x |
$94.98 |
|
2009* |
35.25 |
8.50 |
7.80 |
15.0x |
N/A |
* 2009 figures include VL estimates for Q4
With consensus views for EPS of about $7.75 this year and $9.10 or better for 2010 the current multiple is about 12.8x and the forward P/E is just 10.9x. Those are exceedingly low for this consistent growth company. Compare those with the normalized P/Es of the previous 10 years to see just how cheap these shares are right now.
ESI’s balance sheet looks great with no short-term debt and just $150 million in total debt versus treasury cash of about $300 million. Value Line gives ESI a ‘B++’ for financial strength while noting 95thpercentile scores for both ‘earnings predictability’ and ‘share price growth persistence’ (with 100th being best). ITT Educational Services shares have outperformed 19 of 20 companies in the Value Line universe over the long haul.
Standard & Poors sees ‘fair value’ as $125.60 while Morningstar is even more bullish with a (recently raised) $139 ‘fair value’ estimate and a 4-star ranking (out of 5).
About the only negative is the lack of a dividend. The company seems to have done pretty well with the cash though. Shares outstanding have been pared from 49.23 million at YE 1999 to 37.76 million as of Sep. 30th. EPS have grown from $0.48 to $7.07 in that same (less than 10 year) period. Shareholders have seen over 1100% gains [NOT a misprint] during the past decade.
With macro-economic tailwinds and nothing but great results this seems like an opportune time to pick up some ESI while the valuation is historically low.
A return to even fifteen times next year’s $9.10 estimate would bring these shares to $136.50 or 37.6% above today’s close. Is that a stretch? Hardly. ESI touched $131.80 in 2007 on just $3.71 in full year earnings and they’ve been as high as $133.75 already in 2009.
******************************************************************************************************************
For the option savvy crowd…
Consider this buy/write combo for Jan. 21, 2011:
|
|
Cash Outlay |
">Cash Inflow |
|
Buy 100 ESI @ $99.15 /share |
$9,915 |
|
|
Sell 1 Jan. 2011 $125 Call @ $8.20 /sh. |
|
$820 |
|
Sell 1 Jan. 2011 $125 Put @ $33.20 /sh. |
|
$3,320 |
|
Net Cash out-of-Pocket |
$5,775 |
|
If ESI shares move to $125 or better (+ 26.1%) by Jan. 21, 2011:
· The $125 call will be exercised.
· You will sell your shares for $12,500.
· The $125 put will expire worthless.
· You will have no further option obligations.
· You will end up with no shares and $12,500 in cash.
That best-case scenario would lead to a net profit of $6,725 / $5,775 = 116.4%
achieved in less than 15 months on shares that only needed to rise by 26.1% or more.
What’s the downside?
If ESI shares remain under $125 on Jan. 21, 2011:
· The $125 call will expire worthless.
· The $125 put will be exercised.
· You will need to buy another 100 ESI shares.
· You will be forced to lay out an additional $12,500 in cash.
· You will have no further option obligations.
· You will end up with 200 ESI shares.
What’s the break-even on the whole trade?
On the original 100 shares it’s their $99.15 /share purchase price less
the $8.20 /share call premium = $90.95 /share.
On the ‘put’ shares it’s the $125 strike price less the
$33.20 put premium = $91.80 /share.
Your overall break-even would be $91.38 /share or $7.77 below your
starting price. ESI shares could fall by up to 7.8% without causing a loss.
While that’s far from impossible a glance at my data chart will show that
there hasn’t been one calendar year in the past decade when ESI closed
lower on December 31 than the year before – including the horrendous
market of 2008!
Summary:
ITT educational Services is a high-quality growth stock at a very reasonable
valuation. All signs point to continued success in one of the few expanding areas
of our economy.
Outright purchase of the shares could easily see 30 – 40% returns over the next 12 – 18 months. Buying and writing as described could lever that same gain into a cash-on-cash return of over 116% if you’re well capitalized and willing to play with options.
You’d be protected against loss on the first 7.8% drop if we’re totally wrong on this one.
Disclosure: Author is long ESI shares and short ESI puts.
___________________
Dr. Paul Price: After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools.
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User Comments:
1. Dizzy says on Oct 28, 2009 at 10:39 PM:
Why would you intentionally sell puts at $125 and buy the stock at $99 and sell calls at $125? You have to set aside capital for $12,500 worth of stock when it's trading at $99 for a whole year basically. Why limit your flexibility? It would be nice if you could explain the rationale to a person that has say $250k to invest. They buy $9,900 in stock and have to set aside roughly $8k after accounting for option proceeds to ensure they have enough to buy ESI if it does not go up. Not to mention if ESI gets crushed, that person can lose more than the initial investment which you always glaze over...Pretty amazing you discount it so lightly but want readers to assume major time risk over 14 months of just watching ESI fluctuate.
It's obvious why you can crank out these "ideas" every day since you have done no real work. As I've said in previous posts, just pick PCLN, GOOG, BIDU, anything for that matter, buy the stock, sell puts and calls, just go through the Wilshire by alphabetical order.
The problem with ESI and other for profit players is that they are racking up high levels of bad debt. That's a problem because they're having students enroll but not pay for their classes. Aside from that, for profit ed is a joke and why I've been short STRA, ESI, and APOL off and on.
Bob Shireman was hired as deputy undersecretary for potsecondary ed. He worked for Clinton where he focused on student aid (student loans) and was able to compress the spread lenders enjoyed by pushing the US to increase direct student lending. He has openly stated he sees the for profit sector as enjoying excessive profits given the value of the degrees people obtain. Under Bush, we had Sally Stroup who worked for APOL before seving as deputy us for postsecondary ed. With Shireman you have a major change since he's not coming from the industry and can expect some regulations down the pike.
The degrees are basically worthless. Credits are nontransferable for the most part and the programs lack industry accreditation. For example, these companies offer computer science/IT programs but none of them are ABET/Computer Sci Accreditation Board accredited making those degrees worthless. Corporate reimbursements are a big portion of tuition and given the economy and "perks" of just having a job one would expect that proportion to drop off.
Those are just a few of the aspects that make this sector a joke but you just focused on cursory historical figures.
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2. Jetjam says on Oct 29, 2009 at 5:10 AM:
Nice post Dizzy, your comments often strike me as some of the more intelligent ones on this board.
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