For profit colleges have been the punch line of jokes for years, mostly from me. I have a buddy who went to DeVry, and actually was happy with his experience. He was able to take a four year degree in three years, since they give him all of three weeks off in the summer. It wasn’t ideal from an income generating perspective, but he was happy to be done with school a year earlier than the rest of our graduating class.
As student loan debt has spiraled out of control, people have looked for companies to blame. Rising tuition costs have been covered more than a certain crashed airline (TOPICAL), so we won’t get too far into them. There’s also this attitude we have that condemns non-college attendees to a life of death and despair. There’s no way someone who doesn’t go to college can succeed. So we have all sorts of kids who end up in college who have no business being there.
For profit colleges have a history of targeting those kids, promising them an awesome new career while maintaining their current, somewhat crappier career. For profit colleges take care of all the details, arranging student loans and everything for students. All the student needs to do is show up, and often pay outrageously high tuition fees.
There are a bunch of different for profit colleges out there, but let’s limit our look today to one of the leaders, ITT Tech (NYSE:ESI).
First off, ITT was a free cash machine during the good times. In 2010 and 2011 the company averaged free cash flow of more than $15 per share. Even in 2013, when clouds against the industry were gathering, the company still earned more than $2.50 per share and had free cash flow of more than $3.00 per share. Not bad for a $26 stock.
The balance sheet has greatly improved too. The company has paid down debt to the point where it only owes $50 million. It’s also sitting on more than $200 million worth of cash, but also has $213 million on the balance sheet as “other liabilities,” which is something worth digging into when you read the annual report.
Unlike the strictly online universities, ITT Tech has actual locations and offers actual programs from actual professors. It has more than 140 locations around the U.S. That’s good. It also offers online programs, but at least it has actual locations.
Now onto the bad, because there’s a lot of it.
The biggest red flag was the company just got sued. By the federal government. The reasons are many, but it all boils down to a couple of issues. The company overstated job placement claims and encouraged students to borrow all the student loans. The combination of those things is really bad for students.
This isn’t just an isolated issue either. Rival for-profit college Corinthian announced it has been used by the state of Massachusetts, the state that’s officially the hardest to spell. Corinthian said that Massachusetts had the same problems with them as the feds have with ITT.
Lawsuits are always scary for value investors. They’re why the whole sector has sold off again, for about the 19th time.
Enrollment is down quite a bit from the peak too. Peak numbers were in excess of 70,000 in 2011, now they’re down to the 50,000 range. Revenue has gotten hit hard, falling 17% in the most recent quarter compared to last year. It also lost money in the quarter, but that was due to a one time charge. Normalized earnings were $1.18 per share.
Oh, and ITT Tech has also filed a couple of extensions to file it’s annual report late. This is probably due to the lawsuit from the feds, but yikes.
Okay, back to the good. Not that I really believe analysts, but they estimate the company will earn $3.04 this year and $3.14 next year. Based on previous years, this will give the company cash flow above $4 per share, meaning the stock trades at between 6-7 multiple of cash flow. This would make the company ridiculously cheap at current levels.
There are many risks to ITT Tech’s profitability. Enrollment could continue to go down. Other states could sue the company. The lawsuit by the feds is in the opening stages, and I assume will end up being settled out of court. That number could be huge. The company’s reputation could be damaged going forward. There are a million risks to those earnings estimates.
I’ll pass on ITT Tech for now, but I have a couple of ideas for other stocks in the sector I’ll write about soon.