APOL Apollo Education Grp., Inc.

ITT Educational Services Inc. (ESI), one of the leading providers of technology-based post-secondary degree programs in the U.S., recently delivered third-quarter 2011 results that beat the Zacks' expectation.

The quarterly earnings of $2.85 per share outpaced the Zacks Consensus Estimate of $2.64, but declined 12.1% from the year-ago quarter earnings of $2.82 per share.

ITT Educational registered a decline of 10.0% in revenue to $360.6 million compared with $400.0 million in the prior-year quarter. However, total revenue marginally beat the Zacks Consensus Estimate of $360.0 million.

In third-quarter 2011, the company witnessed a 10.0% decline in total enrollment to 79,219 students compared with 88,004 students in the prior-year period. The overall decline in enrollment was mainly attributable to a 14.1% drop in new enrollments to 22,909 students compared with 26,664 students in the prior-year period. Revenue per student inched down 3.2% to $4,580.

ITT Educational reported a year-over-year decline in the number of probable students interested in the company's study programs in the third quarter of 2011, primarily due to a shift in media mix. Moreover, inquiries transformed into application also decreased during the quarter due to a reduction of 20.0% in recruitment personnel.

The potential risk presently looming over the education sector is the uncertainty over the Pell Grant program. The U.S. Senate has passed a resolution to cut $38.5 billion from the federal budget in fiscal 2011.

However, the Obama administration has maintained the maximum amount for Pell Grants at $5,550 per student for 2011-12 academic year. Further, the federal budget cut may have an impact on the number of student getting Pell Grant approval from the Department of Education.

However, ITT Educational in its first-quarter 2011 earnings call conference has revealed that the recent federal budget cut will not have a significant impact on the company's cash flows until 2013. But, whenever it does, it will be within the range of $20.0 million to $30.0 million.

ITT Educational, which conducts programs through its ITT Technical Institutes and Daniel Webster Colleges, notified that the cost of educational services rose 5.4% to $141.3 million. However, student services and administrative expenses declined 4.5% to $109.5 million.

Consequently, ITT Educational's operating income of $109.5 million, logged a decline of 27.4%. Moreover, operating margin contracted 730 basis points to 30.5% in the quarter.

ITT Educational ended the quarter with cash and cash equivalents of $172.6 million, long-term debt of $150.0 million, and shareholders' equity of $128.5 million. The company generated $49.1 million in cash from operations, incurred capital expenditure of $7.8 million and repurchased shares worth $30.0 million during the period.

Management now expects fiscal 2011 earnings to be in the range of $10.40 to $10.60 per share compared with $10.00 to $10.50 forecasted earlier. The current Zacks Consensus Estimate of $10.32 lies within the company's guidance range. Moreover, the company has set preliminary target to earn in the range of $7.50 to $8.50 per share in fiscal 2012.

During the quarter under review, the company has started its operations at new five locations in Marlton New Jersey, Hanover Maryland, Philadelphia Pennsylvania, West Palm Beach Florida and Germantown Wisconsin. Currently, ITT Educational operates through 136 campuses and 4 learning sites. Moreover, the company has planned to begin its operations at 2 or more new locations during the rest of current fiscal year.

The company's nearest competitor Apollo Group Inc. (APOL) recently reported its fourth-quarter 2011 earnings per share of $1.02, declining 22.1% from the prior-period earnings of $1.31. However, earnings surpassed the Zacks Consensus Estimate of 93 cents a share.

Currently, we have a long-term Neutral rating on the stock. ITT Educational holds a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation that correlates with our long-term view of ‘Outperform’.

 
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