ITT Educational Services Inc (ITT) Company Research
ITT Educational Services Inc is a provider of post-secondary degree programs in the United States. Offered master, bachelor and associate degree programs to approximately 73,000 students, which has144 locations (including 141 campuses and three learning sites) in 39 states.
The company offered one or more of its online programs to students who were located in 48 states, helping them to prepare for careers in various fields involving their areas of study.
How does ITT Educational Services make money?
ITT Educational Services Corporation, Incorporated is one of the largest for-profit education companies and offers primarily 2-year and some 4-year degrees in a number of subjects. Their revenue is generated from the number of enrolling as they experienced significant growth in students. Part of company’s income derives from Federal financial aid programs.
Who is running the business and what is their background?
Mr. Kevin M. Modany is Chairman of the Board, Chief Executive Officer of ITT Educational Services Inc. He has served as Chairman since February 2008 and as Chief Executive Officer since April 2007. He also served as President from April 2005 to March 2009. From April 2005 through March 2007 he also served as Chief Operating Officer.
Mr. Modany has been a Director of ours since July 2006. Mr. Modany had previous experience in advising other companies on financial and operational matters, and he had involvement in the financial and operational aspects of the company before becoming Chief Executive Officer.
Mr. Daniel M. Fitzpatrick is Chief Financial Officer, Executive Vice President of ITT Educational Services Inc. He served as Senior Vice President, Chief Financial Officer from June 2005 through March 2009.
ITT Financial Liquidity
The average current ratio was 1.35 which means that its current asset was higher by 35% compared to its current liability while quick ratio was also 1.22 averaged.
Debt to equity ratio was averaging 0.98 which means that ESI has minimal leverage.
And solvency ratio was 1.96 averaged in 5 years period which shows that the company was capable of paying its total obligations.
The liquidity of ESI lies in the normal level. The company’s current resources were just sufficient to continue its operation with excess funds for unexpected opportunities.
ITT Asset Management/Efficiency
Inventory turnover ratio was 0. as this industry has no record of inventory. Receivable turnover ratio average was 26.99 times per period. This is equivalent to 15 days for its receivable to turn into cash. For some companies, this is the credit term given to their respective customers. The payable turnover ratio has an average of 20.60 times for the company to pay its obligations or 47 days for its suppliers to pay.
Looking at the above data, the company’s current resources, as well as its total asset, is efficient enough in generating sales.
ESI is not highly indebted as calculated in the debt ratio. However, if compared to the owners’ equity it reflected an average of .98, this is because the company has not many capital investments.
ITT Property, Plant & Equipment
Gross investment in PPE average in five years was 340.20. It showed that the company was yearly expanding thru investment in fixed assets. Accumulated depreciation average was 150. It is a cumulative cost allocated to a tangible asset over its useful life. So, the net value of the PPE after deducting its accumulated depreciation was 190.20.
To calculate it using an estimated life of 5 years, the average used life of the said fixed asset was 2.2 years already. And it was still a remaining 2.8 years to use before it is fully depreciated.
Revenue was 1015, 1319, 1597, 1500 and 1287 with trailing twelve months of 1108. Shown here, the gross revenue was yearly increasing from 2008 to 2010 but pulled down from 2011 to 2012. Its yearly growth rate was 30, 21,-.06 and -.14 percent.
Its operating income was 328, 489, 614, 507 and 233 with ttm of 104. This is the amount after deducting the operating expenses.
Income before and after tax have the same trend, continuously increasing until 2010 but dropped a little in 2011 while 50 percent in 2012. Its yearly growth rate was .48, .25, -.18 and -.55 percent respectively.
The net income was consistent going up in 2008 to 2010 but showed a slight decrease in 2011 and dropped by more than 50 percent in 2012. The company needs to be closely monitored.
The cost of revenue was 384, 450, 538, 553 and 539 with ttm of 500 which is equivalent to 37 percent average of gross revenue. It has the same trend with revenue.
Operating expense was 304, 381, 445, 440 and 515, with of ttm of 503, which is equivalent to 31, 30, 29, 28 and 29 percent respectively of revenue. While another expense the trailing twelve months was 43 or 4 percent of revenue. And total expense was 436, 573, 687, 642 and 609, with trailing twelve months of 546. This represents 49 percent of gross revenue.
Total expenses of the company are quite high especially in the year 2012 which unmatched its revenue. So, the company needs to control its expenses.
Gross margin was .62, .66, .66, .63 and 58, trailing twelve months was .55, this is the percentage result of gross profit over revenue.
Operating margin was 32.3, 37.1, 38.4, 33.8 and 18.1 percent, trailing twelve months was 9.4 which shows a continuous increase from 2008 to 2010 but slightly dropped by 5 percent in 2011 and 17 percent in 2012.
Net profit margin was 20, 23, 23, 21 and 11 percent, with ttm of 17. This is the bottom line of ESI’s business transactions expressed in percentage.
ITT CASH FLOW
Operating cash flow from 2008 to 2012 was 173, 301, 559, 388 and 105 ttm was 115. It shows positive results throughout the five years period, although up and downtrend.
Net cash used in investing activities from 2008 to 2012 was 129, -64, -99, -46 and 123. Its trailing twelve months was 133. It shows negative results except in 2008 and 2012 because cash inflows were greater than cash outflows which are mostly investments.
Cash Flow from Financing Activities
Financing cash flows refer to cash received from the issue of debt and equity or paid out as dividends, share repurchases or debt repayments.
Net cash used for financing activities of ESI from 2008 to 2012 was -83, -334, -424, -277 and -211, with trailing twelve months of -245. Its cash inflows include common stock issued, the excess tax benefit from stock and other financing activities while cash outflows include repurchased of common stocks.
Financing cash flow showed a negative balance since its cash outflow transaction was more than its cash received.
Free Cash Flow
Free cash flow from 2008 to 2012 was 137, 273, 526, 357 and 87 which show positive balance throughout the five years period. It indicates that the company has enough funds to continue its operation and expansion.
Based on the overall performance of ESI, the company was able to meet its financial and operational commitments.
Relative Valuation Method for ITT
The current book value per share was $5.44, with an average of $5.62 per share, while the price to earnings ratio in the trailing twelve months (ttm) was 5.5% per share and 8.28% average per share. Moreover, the earning per share at ttm was $2.61 and averaging $7.31 while the return on equity at ttm was $36.94 and has an average of $155.6 per share.
Overview, it indicates that ESI has a good measure of profitability it also shows that the company was able to generate a favorable and stable return on the invested capital.
The table below shows the summary of calculations of ESI using this method.
The growth was 5 percent while the dividend yield was 0. The calculated value of appreciation is $15.64. Further, the computed value dividend was 0 and the computed total value was $ 23.46. The price that the investor is willing to pay was $23.46. Furthermore, the market price of ITT/ESI to date was $ 7.82 per share. If we compare this to the total value of $ 23.46 per share, it indicates that the stock is trading at undervalued prices, therefore, it is a “Buy”.
To sum it all, the results show that ITT/ESI is financially healthy as far as its current resources are concerned in spite of the fact that the stock price is unstable due to issues like low net income and weak cash flow.
Income wise, though it is decreasing lately, the company is still continuously generating income, with fairly controlled expenses which resulted in a fair profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and moderate free cash flow.
Furthermore, our investment valuation method shows that ESI is still undervalued.
Researched and Written by Rio
Edited by Cris