ITT Educational Services and Education Business and Education & Workforce Development

CEO convinces investors that ITT is on the rebound

January 24, 2013

For a guy who leads a company with stock that has lost 75 percent of its value in the past year, Kevin Modany, the CEO of ITT Educational Services Inc., sounds pretty upbeat.

And it seemed to rub off on investors Thursday.

After the Carmel-based operator of for-profit companies issued a disastrous fourth-quarter earnings report Thursday morning, the company’s stock price fell more than 18 percent—at one point reaching a low not seen since 2001.

But, at 11 a.m., Modany began charming Wall Street analysts and investors with a highly detailed presentation that gave this message: It’s morning at ITT.

By the time Modany finished speaking at 11:58, ITT Educational’s stock was back in positive territory for the day. And it stayed there, climbing 18 percent by the close of trading, to $16.85 per share.

Modany revealed that ITT Educational students are defaulting on a block of $400 million in private student loans at a stunning rate of 60 percent. That’s twice as much as historical norms and even 20 percent worse than ITT Educational’s assumed worst-case scenario.

ITT Educational guaranteed repayment of those loans, so it was forced to set aside $66.1 million in the fourth quarter to cover future losses on that portfolio.

“We’re not pleased with this. These default rates are much higher than we’ve ever seen,” Modany told investors. But, he added, “The focus here is to try to get a fence around that thing and see if we can put it behind us.”

Modany painted the $66 million charge as a high-end estimate of ITT Educational’s loan exposure. He said the company is lobbying the private lenders on the loans to modify the terms of repayment, so students can make smaller payments, or have longer terms or possibly even have debt amounts reduced.

If any of those efforts pay off, Modany said, ITT Educational’s charges could come in lower.

"Thank you for providing all the color," Kelly Flynn, an analyst at Credit Suisse, said during the ITT conference call. Other analysts echoed her sentiment.

Modany and his chief financial officer, Dan Fitzpatrick, also waved away some analysts’s concerns about ITT running short of cash. It has seven to 10 years to pay off its loan obligations.

Meanwhile, Modany gave a preliminary but positive report on ITT Educational’s new scholarship program, which ITT piloted late last year at 24 of its 175 campuses.

The scholarships effectively reduce the average cost of an ITT associate’s degree from $47,000 to $27,500.

Those 24 campuses saw new student enrollment declines of just 6.3 percent in the fourth quarter, compared with declines of 12.7 percent at all other ITT campuses. The scholarship program also yielded a higher percentage of potential students who inquire about ITT actually enrolling, Modany said.

“The preliminary results thus far are positive and heading in the right direction,” Modany told investors.

Beginning this month, ITT Educational expanded the “opportunity scholarship” program to 101 more campuses. And it will expand it to all its schools by the end of the year, essentially replacing all private loan programs.

ITT Educational students will, of course, still use federal loans to pay ITT’s pricey tuition. Such loans account for more than 75 percent of ITT Educational’s annual revenue of $1.3 billion.

In an interview Thursday afternoon, Modany said he and his management team stuck with the private loan programs as long as they did because not until the middle of 2012 did their internal data show prospective students becoming more sensitive to the net cost of an ITT degree.

“Prospective students, five years ago, 10 years ago, it wasn’t about, ‘What was the cost?’ It was about out-of-pocket: ‘Do I make a payment now or later?’ “What’s my monthly payment?’” Modany said.

But, Modany added, “When you’re five years into this kind of a downturn, you’re more sensitive to any kind of investment.”

He also cited pressure from the Obama administration’s focus on whether graduates of for-profit colleges were landing “gainful employment” that allowed them to repay their student loans, as well as publicity shined on the debt loads of for-profit students by news media and Senate hearings.

“So we had to change. We had to change how we present our programs of study, and that’s why the scholarship came into play,” Modany said.

Modany acknowledges that the scholarship program—along with ITT Educational’s other challenges—will put pressure on its profits.

The company predicted its revenue per student will drop this year by 4 percent to 6 percent. It also predicted total profits ranging from $3.50 per share to $4 per share—a huge drop from its earnings per share in 2012 of $5.85 per share. Before Thursday, analysts were expecting earnings of $4.53 cents per share this year.

But Modany also thinks the lower effective prices—dropped into an environment in which students are more price sensitive—could boost enrollment by as much as 5 percent this year. And if that happens, ITT Educational could end up doing even better than before. At least he hopes.

“So if we’re able to generate some enrollment growth, we’re seeing the vast, vast, vast majority of those incremental revenues fall to the bottom line,” Modany told investors.

Translation: We can only go up from here.

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