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ITT Educational Services rebounds from federal probe: With stock at 52-week high, company plans growth

November 21, 2005

After rebounding from a federal criminal probe that uncovered no wrongdoing, ITT Educational Services Inc. is proceeding with an ambitious growth plan in hopes of building upon a bullish earnings run.

The U.S. Attorney's Office in Houston, which led the investigation into whether the Carmel-based private provider of postsecondary degree programs had falsified student records, acknowledged in June that it did not turn up evidence justifying the charges.

"It was very, very disruptive and very distracting to the organization," ITT CEO Rene Champagne said of the 16-month investigation. "What we had to do was try to get into a crisis-management mode where a select group of individuals dealt with it on a day-to-day basis."

Federal agents converged on ITT's northwest-side offices in late February 2004 searching for records related to admissions and recruitment. The district court in Houston also issued search warrants for ITT campuses in Texas, Virginia, Florida, Louisiana, Nevada, California and Oregon.

The company's stock plummeted 33 percent immediately following the announcement and bottomed out at $27.83, wiping $1.3 billion off the company's market value. In late October, Champaign reported in a third-quarter conference call that ITT has doled out $25.1 million in legal costs related to the investigation and expects to spend another $1.25 million.

Despite the turmoil, the company posted record revenue of $617 million in 2004, up 44 percent from 2001, while recording $75 million in profit. The stock price, meanwhile, climbed steadily to reach a 52-week high of $62.34 earlier this month. In the first two weeks of November alone, the shares soared roughly $7.

Stock analyst Mark Hughes, who follows ITT for Robinson Humphrey Capital Markets in Nashville, rates the stock a "buy."

"At the time, it was very negative," Hughes said of the investigation. "But even through it, [ITT has] been reporting solid financials, so investors have been hanging in there. We like ITT."

In the third quarter of this year, ITT earned $176.8 million in revenue, up nearly 12 percent from the same time last year, while profit rose 24.6 percent to $30.5 million.

Champagne attributed the solid earnings report mostly to the fading legal challenges and a long-term growth initiative ITT has undertaken. The crux of the plan includes increasing the number of campus locations, course offerings and online programs.

ITT will open its next college in Tulsa, Okla., and is targeting Flint, Mich., and Fresno, Calif., for further expansion. Pending regulatory approval, the company could have 82 schools operating by Dec. 31. The goal is to launch three to five new campuses annually to reach 100 locations by 2010, Champagne said.

To help fund the growth, the company has repurchased $8 million worth of stock and is considering buying additional shares soon. The growth plan includes establishing "learning sites" in cities of existing campuses. In the Indianapolis area, for instance, ITT has a second site in Greenwood to make it more convenient for more people to enroll.

Adding to the convenience is the proliferation of course offerings over the Internet. As of Sept. 30, ITT online course registrations increased 72 percent, to 38,029, compared with 22,128 the prior year. ITT offers both partial and online degree programs.

ITT offers five areas of study: information technology, electronics, drafting and design, criminal justice, and business. The company added the latter two during the past year to broaden its scope beyond its technology core and attract more students.

Another initiative involves raising associate-degree courses to the bachelor's level. As of Sept. 30, 25 percent of ITT's students were pursuing a bachelor's degree, more than double the percentage in 2004.

The enrollment growth ITT has experienced by adding programs is as responsible for the company's rebound as is the conclusion of the investigation, said analyst Trace Urden. He follows ITT for Robert W. Baird & Co. in San Francisco.

But Urden thinks the enrollment growth will level off.

"To a certain extent, the enthusiasm that is in the stock price right now might be a little bit overdone," he said. "Not to take away from anything that [ITT] has accomplished, but it's hard for me to believe that the stock price will be sustained by the numbers [it's] likely to report as [it] goes forward."

ITT is dependent on federal and other student loan programs for its sales. Before the investigation, in 2003, the company indirectly got 71 percent of its $522.9 million in revenue from federal student aid programs, according to the year's annual report.

The investigation followed grand jury subpoenas for information on retention rates, student placement, attendance, recruitment and admissions. ITT's retention rate dropped nearly 3 percent, to 69 percent, during the third quarter. ITT attributed the decline to the closing of its Saint Rose College in New Orleans and the increase of online course registrations.

Champagne, who said the convenience of online studies is stymied by lower retention rates, is encouraged about ITT's future.

"From a performance point of view, 2004 was the best year in the history of the company," he said. "Subject to the company's ability to continue to grow, one would assume the stock price would go along with the growth the company is capable of achieving."
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