Term Paper on "Strategic Financial Analysis Itt Educational Services, Inc"

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Strategic Financial Analysis- ITT Educational Services Inc. (ESI)

Strategic Financial Analysis -- ITT Educational Services Inc. (ESI): A Venture Capitalist Analysis

The education and training services industry in the United States today represents a major opportunity for venture capitalists seeking to capitalize on the current trend in the manner in which educational services are being delivered, particularly to adult learners. One of the current leaders in this industry is ITT Educational Services, Inc., a private college system that offers various technology-oriented programs of study. The company operates more than 75 ITT Technical Institutes in 30 states, providing approximately 40,000 adult learners with career-focused, degree programs. Further, the company has been in the business for a comparatively long time, having been actively involved in the higher education community in the United States since 1969. This company would appear to represent a highly attractive investment opportunity, but the prudent venture capitalist will seek to determine as much relevant and timely information as possible concerning the financial performance of the enterprise, which is the purpose of this study. The study uses a review of the peer-reviewed and scholarly literature, together with current periodicals and reliable organizational online resources, to develop a snapshot view of ITT Educational Services, Inc. today.

Strategic Financial Analysis -- ITT Educational Services Inc. (ESI): A Venture Capitalist Analysis

1.0

Executive Summary

1.1

Company Description. Just a decade ago, many of the companies at the time that are now household names in the "education industry" were virtually unknown by the American public. In January 1996, the "education industry" was created overnight in the form of a news report in the New York Times that officially placed these companies on the map; these companies included Sylvan Learning Systems, DeVry Institute, ITT Educational Services, Inc., and KinderCare (Garber & Steiger, 1996).

Today, ITT Educational Services, Inc. (hereinafter alternatively "the company" or "ITT") provides technology-oriented postsecondary degree programs in the United States. The company provides associate, bachelor and master degree programs, and non-degree diploma programs to adult learners. As of December 31, 2004, the company had 77 institutes located in 30 states that served approximately 44,000 students. As of that date, the company offered 17 degree programs and diploma programs in various fields of study, including information technology, electronics technology, drafting and design, business, and criminal justice. The company was incorporated in 1946 and is currently headquartered in Carmel, Indiana (Company profile, 2005, p. 1).

1.2

Industry. The company competes in the Education & Training Services Industry; besides education management groups such as ITT, the education industry also includes sectors such as educational services (learning centers, test-preparation companies) and educational products (textbooks, software) (Garber & Steiger, 1996).

1.3

Company's position in the industry. According to Morey (2001), over the past decade or so, the emergence of for-profit, degree-granting, accredited institutions of higher education has the potential of providing real competition and altering some segments of nonprofit higher education; in fact, within a period of just about five years, postsecondary proprietary education transformed itself from a small sector of the economy mainly offering specialized trade training to a $3.5 billion a year business that is dominated by companies building regional and national franchises (Morey, 2001).

This author reports that some of the historical major competitors in the education and training services industry are:

1.

The Apollo Group (www.apollogrp.com). This company offers certificate programs as well as associate's, bachelor's, master's, and doctoral degrees through its subsidiaries);

2.

The University of Phoenix, Inc. (UOP).

3.

The Institute for Professional Development;

4.

The College of Financial Planning Institutes Corporation;

5.

6.

Apollo Learning Group, Inc. Currently, Apollo offers educational programs and services at 55 campuses and 98 learning centers in 35 states, Puerto Rico, and Vancouver, Canada; the school's combined degree enrollment is approximately 104,000 students;

7.

DeVry (www.devry.edu). This company specializes in business and technical education and has more than 40,000 students in business and technology at sites in the United States and Canada; and,

8.

ITT Educational Services (www.itttech.edu). Today, ITT operates more than 78 technical institutes, enrolling more than 25,000 students seeking associate's and bachelors degrees in technology fields (Morey, 2001).

In fact, U.S. Department of Education statistics indicate that all of the ITT Technical Institutes combined granted the largest percentage (14.7%) of the total number of associate and bachelor degrees awarded in the U.S. In electronics and electronics-related programs in the 2000-2001 school year (the latest year for which statistics are available); in addition, all of the ITT Technical Institutes combined granted the largest share (22.6%) of the total number of associate's and bachelor's degrees awarded in the U.S. In drafting programs during the same period. The company has also been more successful at attracting, and graduating, higher percentages of black men than not-for-profit colleges and universities in recent years (Coffee, 2004). Not surprisingly, then, today, ITT is among the top five companies in the Education & Training Services Industry.

1.4

Summary of recommendations. The company is faced with some tough challenges in the months ahead, not the least of which are ongoing investigations by the Department of Justice and the Securities and Exchange Commission; nevertheless, based on the company's historic financial performance as well as its lengthy experience in the Education & Training Services Industry, ITT appears to represent a viable investment opportunity for the savvy venture capitalist today.

2.0 Situational Analysis

2.1 Historic Financial performance (past 5 years to date)

Figure 1. Stock Performance: ITT Educational Services, Inc. (ESI) versus Dow Jones, S& P. 500 and NASDAQ -- Past Five Years to Date.

Source: Yahoo! Finance, 2005.

2.1.1

Table 1 -- Revenues. The company's Annual Report dated March 15, 2005, notes that ITT earns almost all of its revenues from tuition, tool kits, fees and charges paid by, or on behalf of, our students.

Table 1. Total Revenues: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Period Ending

31-Dec-04

31-Dec-03

31-Dec-02

Total Revenue

617,834

522,856

464,946

Cost of Revenue

298,747

280,006

267,503

Gross Profit

319,087

242,850

197,443

Source: Yahoo! Finance, 2005.

Figure 2. Total Revenues: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Source: Yahoo! Finance, 2005.

2.1.2

Table 2 -- Operating Income.

Table 2. Operating Income: ITT Educational Services, Inc. (ESI) -- December 31, 2002 -- December 31, 2004 (All numbers in thousands).

Period Ending

31-Dec-04

31-Dec-03

31-Dec-02

Income from Continuing Operations

Total Other Income/Expenses Net

3,834

1,995

2,684

Earnings Before Interest And Taxes

123,382

96,516

70,993

Interest Expense

Income Before Tax

123,382

96,516

70,993

Income Tax Expense

48,119

37,658

27,139

Minority Interest

Net Income From Continuing Ops

75,263

58,858

43,854

Non-recurring Events

Discontinued Operations

Extraordinary Items

Effect Of Accounting Changes

Other Items

Net Income

75,263

58,858

43,854

Preferred Stock And Other Adjustments

Net Income Applicable To Common Shares

$75,263

$58,858

$43,854

Source: Yahoo! Finance, 2005.

2.1.3

Earnings per share.

Table 3. Earnings History -- ITT: September 2004 -- June 2005.

Earnings History

Dec-04

Jun-05

EPS Est

0.46

0.67

0.40

0.46

EPS Actual

0.52

0.72

0.42

0.48

Difference

0.06

0.05

0.02

0.02

Surprise %

13.0%

7.5%

5.0%

4.3%

Source: Yahoo! Finance, 2005.

2.2

Historic comparison of Company ratios to Industry Average.

Figure 3. Historic comparison of Company ratios to Industry Average (latest data available)

Source: Yahoo! Finance, 2005.

2.3

Financial market position.

Growth Estimates

Industry

Current Qtr.

17.3%

14.1%

Next Qtr.

12.5%

14.7%

This Year

20.2%

12.9%

Next Year

16.4%

15.9%

Past 5 Years (per annum)

30.3%

N/A

Next 5 Years (per annum)

20.0%

14.67%

Price/Earnings (avg. For comparison categories)

20.6

18.64

PEG Ratio (avg. For comparison categories)

1.03

1.27

Source: Yahoo! Finance, 2005.

2.3.1 Market Cap.

Table 3. Top Five Education & Training Services Companies by Market Cap (as of October 20, 2005).

Company

Symbol

Price

Market Cap

P/E

Apollo Group Inc.

APOL

60.70

10.96B

25.39

Career Education Corp.

CECO

34.60

3.56B

17.06

Laureate Education Inc.

LAUR

47.81

2.38B

36.44

Education Management Corporation

EDMC

30.63

2.30B

22.66

ITT Educational Services Inc.

48.91

2.26B

25.62

Source: Yahoo! Finance, 2005.

Figure 3. Top Five Education & Training Services Companies by Market Cap (as of October 20, 2005).

Source: Based on data in Yahoo! Finance, 2005.

2.3.2 Institutional ownership.

Table 4. Major Holders of ITT as of October 20, 2005.

% of Shares Held by All Insider and 5% Owners:

9%

% of Shares Held by Institutional & Mutual Fund Owners:

% of Float Held by Institutional & Mutual Fund Owners:

Number of Institutions Holding Shares:

Source: Yahoo! Finance, 2005.

2.3.3 Insider Ownership.

Table 5. Major Direct Holders (Forms 3 & 4).

Holder

Shares

Reported

Blum Capital Partners, L.P.

860,600

17-Oct-05

Araskog, Rand V.

207,108

1-Jul-05

Champagne, Rene R.

101,188

5-Nov-03

Lauer, Thomas W.

19,006

2-Feb-04

Dean, John E.

16,209

1-Jul-05

Source: Yahoo! Finance, 2005.

2.3.4 Share volume.

Table 6. Share volume.

Open

High

Low

Close

Volume

Adj Close*

19-Oct-05

48.01

49.02

47.48

48.91

179,500

48.91

Source: Yahoo! Finance, 2005.

2.4

Financial strengths and weaknesses.

24.1

Strengths. Notwithstanding the ongoing SEC and Department of… READ MORE

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