Credit-market turmoil casts uncertainty over ITT Educational Services

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ITT Educational Services Inc. and other for-profit schools are facing a maelstrom of financial threats that analysts say
could hurt student recruiting and profit margins–and already has driven stock prices down sharply.

ITT shares are off 61 percent since hitting an all-time high of $131.82 in November.

Analysts agree the companies took the worst hit in January, when Virginia-based Sallie Mae, the largest student-loan provider
in the country, said it would stop making loans to students considered subprime borrowers, one of their key markets. Twenty-nine
percent of ITT's $870 million in 2007 revenue came from private student loans, 17 percent of which were classified as

Sallie Mae's surprise announcement is an outgrowth of the subprime mortgage crisis, which has caused banks and other
lenders to tighten overall lending standards. That's made it tougher for even the best credit risks to line up loans.
All this is happening against the backdrop of the slumping economy, which may cause potential students to rethink major spending
decisions. Associate's degrees at for-profit schools can run tens of thousands of dollars, as much as 10 times the cost
of a public community college.

"This is a 100-year flood," analyst Alex Paris said of the pressures ITT is facing. "This situation is temporary,
but no one knows how long it'll last."

All of ITT's principal rivals are feeling the same pain. Shares of both Hoffman Estates, Ill.-based Career Education
Corp. and Santa Ana, Calif.-based Corinthian Colleges have tumbled more than 60 percent since peaking last year. Since ITT
shares topped out four months ago, the company's stock market value has fallen $3.2 billion.

Despite the intense pressures, ITT CEO Kevin Modany was upbeat during the company's fourth-quarter earnings call with
analysts on Jan. 24.

"The termination of our agreement with Sallie Mae will not have any substantive impact on the funding available to our
students or on our anticipated operating results," Modany told analysts.

Still, about a month after the call, ITT cut its per-share earnings expectations for 2008 to $4.10 to $4.60 a share, from
$4.50 to $4.60 a share. In a filing with the Securities and Exchange Commission, the school cited uncertainty about prospective
students' ability to secure loans in the increasingly tight lending market.

ITT officials this month declined to comment to IBJ.

Filling funding void

To counter Sallie Mae's pullout, ITT announced in January that it had reached agreements with three lenders to provide
private loans–Bank of America, Chase Education Finance and Citibank.

ITT said it would provide loans itself to fill the potential funding gap after students secure federal aid and borrow from
the new lenders. It's a new line of financing for ITT, one that likely will increase its bad debt expense. While ITT told
analysts it can't calculate its exact exposure, the company acknowledged bad debt could exceed its historical range of
1 percent to 3 percent of revenue.

ITT also plans to raise tuition 5 percent this month. It might boost its scholarship offerings as well.

During the Jan. 24 call, Modany confidently pointed out that "students have been borrowing money to help pay the cost
of their education for over 30 years that have included periods of economic prosperity as well as market recession."

Some find Modany's assurances that the company has all its bases covered hard to believe.

"The challenge in ITT's case is that I'm not sure management has adequately persuaded investors that they have
their arms around the situation," said Trace Urdan, an analyst with Signal Hill Capital Group in San Francisco. "This
current management team is very tight-lipped. So it's hard to get behind their assumptions to believe if they're valid."

Some analysts also worry that ITT is not looking far enough ahead.

No one, including ITT executives, knows if the school's three new loan providers will change lending practices or even
pull out of the subprime market once the 2008-2009 academic year concludes–the end date of their agreements with ITT.

"Their guidance is a little disingenuous," Urdan said. "The full effect of their lending to students won't
be felt until 2009. Those numbers could be down a full dollar. To their credit, they don't know, but they come across
lacking some credibility because they seem to be so optimistic," he said. "The management team hasn't really
ever managed through a cycle like this so that's another part to gauge. Can you trust their guidance?"

A leadership test

This is the first major test for Modany, 41, whom the company promoted to CEO a year ago. He succeeded Rene Champagne, who
retired after 22 years at the helm.

Some analysts believe Modany has the challenges under control.

"No I don't think they're being too optimistic," said Paris, who is with Barrington Research in Chicago.
"They're realists. They're not trying to give a false sense of security."

Paris, who speaks with Modany weekly, has remained bullish on ITT's stock, reiterating his "outperform" rating
and calling it a good buy for long-term investors. He said the decline in price is due to the cloud of uncertainty over the
economy as a whole, and the complicated nature of the highly regulated for-profit education industry.

Still, to confirm his outlook, Paris recently visited management to read body language and gain other insights not easily
gleaned over the telephone.

"My confidence in this management was reinforced after my visit," Paris said.

ITT has ample cash to make loans itself, he said. The company had more than $300 million in cash at year-end and could raise
$600 million quickly, he said. "Liquidity is king right now."

And he said the company, which operates 97 campuses in 34 states, continues to pump out strong results. Revenue in 2007 rose
12 percent over the prior year, and enrollment increased 15 percent, to 53,000. Profit shot up to $152 million, a 30-percent

Even so, Paris said, "while [ITT management] exuded confidence, they're playing it very conservative and being very
cautious in what they say. There's a lot they just don't know."

There's also a lot for-profit schools don't have to tell. Graduation rates are reported to the federal government
each year but not publicly, so it's difficult for investors to gauge the quality of ITT's product–the students who
successfully complete their programs. Loan default rates also aren't disclosed. Paris said it's realistic to assume
they're between 40 percent and 50 percent, in line with schools that do disclose their numbers.

Other analysts' views on ITT generally fall between Urdan's and Paris'.

Analysts at Lehman Brothers, William Blair and Co. and Morgan Stanley lowered their 2007 earnings estimates when ITT cut
expectations, but to varying degrees; none has an estimate below $4.10, the low end of ITT's forecast.

And ITT's decision to scale back expectations actually has boosted management's credibility with some analysts.

"While the reduced guidance is disappointing, we believe it was the right thing to do, as investors did not believe
the company's prior guidance," said Gary Bisbee with Lehman Brothers in a report. While ITT stock likely will remain
volatile in the near future, he wrote, it "is likely to be significantly higher in 12-18 months than its current price."

Suzanne Stein of Morgan Stanley said the company's plan to fill funding gaps by making loans itself "raises concerns,
particular if credit markets deteriorate further."

But Paris believes the crisis already is beginning to recede. He said ITT in 2009 might post earnings per share of $5, up
35 percent from 2007 levels.

He doesn't think ITT will be stuck filling the funding gaps for long. Once credit markets loosen up, Paris said, other
financial institutions might buy its loans.

"The credit markets are stabilizing," he said. "That gives ITT a little more confidence on where things might
be going."

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