Wednesday, May 12, 2010

Quick Analysis: ITT Educational Services (ESI)

ESI: ITT Educational Services

For Profit Education Company

Recent Range: $45/share – $125/share (Current Price: 103.16, as of close of 5/11/10)

Price/Sales (P/S) = 2.52 (3.40, Industry)
Price/Book (P/B) = 22.91 (7.83)
Gross Margin = 65.9% (56.9%)
Pre-Tax Margin = 37.8% (16.5%)
Debt/Equity Ratio = 0.96 (0.16)
Current Ratio = 1.3 (1.7)
Return on Equity = 192.3% (47.8%)
Return on Assets = 50.2% (20.0%)

Analysis: I get the feeling that this stock will rise, but I don’t feel comfortable recommending it.



This stock does not produce any dividends, but most of the companies within this industry do not. The ones that do pay poorly (about 1%).

The industry could be facing a tough period. There is talk about the federal government reducing loans and scholarship money available for proprietary (private for profit) schools.

However, a lot of people are going to school right now. Proprietary schools could be part of a booming business just as easily.

This company makes a nice profit and gets really good returns on investments. Plus, the earnings are really good. They seem to be in a growth mode.

However, they are not growing without risk. That debt is huge. That can’t be emphasized enough. They have some cash on hand, but if their credit source suddenly dries, this company does not seem to be structured to withstand this for very long. There’s just too much debt and nearly enough cash available to them.

Their stock price is closer to its 3-year high than its low. The book value of this company is a whole lot lower, but the earnings seem to blind a lot of people from this.

This company has a big fundamental flaw, but momentum has me predict this stock will rise during the next year.

You won’t see me investing in it, though.

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