ITT Educational (ESI) Misses On Q1 Earnings, Outlook Bleak

Share price of ITT Educational Services, Inc. (NYSE:ESI) fell almost 12% on Apr 29, after the company reported weak first quarter sales and profits and lowered its new enrollment guidance for 2016.

The education company reported earnings per share of 17 cents in the first quarter of 2016, missing the Zacks Consensus Estimate of 19 cents by 10.5%. Moreover, earnings per share decreased 61.4% from 44 cents in the prior-year quarter due to lower revenues and weak margins.

The company reported revenues of $191.5 million, which beat the Zacks Consensus Estimate of $190 million by 0.8%. Revenues, however, fell 16.7% year over year due to a decline in enrollment levels.

Total enrollment of 43,293 students was down 15.4% year over year owing to declines in continuing students and new student enrollment.

New enrollment of 11,788 students declined 16.4% year over year, owing to a challenging new student recruitment system.

New enrollment was hurt by closure of the enrollment process across some of the campus locations and lower conversion rate. Many prospective students, who had enquired about the programs, did not start classes. Management believes that the lower conversion rate was due to students’ concerns about the cost of post-secondary education and its value amid economic and labor market disruptions.

Continuing students declined 15.1% year over year. However, persistence rate increased 90 basis points (bps) to 70.1%, owing to an improvement in students’ retention.

Operating margin decreased 460 bps to 7.4% owing to weak revenues. As a percentage of revenues, bad debt expense moderated 150 bps to 3.8% during the quarter owing to the company’s cost control efforts.

Outlook

The company does not expect the enrollment scenario to improve in the rest of 2016. As such, the company lowered its new enrollment guidance. For 2016, the company expects new enrollment to decline in a range 15% to 20%, which is significantly worse than the prior expectation of 12% to 15% decline.

However, given the company’s ability to control cost, the company raised its guidance for earnings before interest, taxes, appreciation and amortization (EBITDA) for 2016. EBITDA for fiscal 2016 is now expected to range between $55 million to $75 million, compared to the prior expectation of $50 million and $70 million.

ITT Educational Services has a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the education industry include American Public Education, Inc. (NASDAQ:APEI) , New Oriental Education & Technology Group Inc. (NYSE:EDU) and Capella Education Co. (NASDAQ:CPLA) . While American Public Education and New Oriental Education & Technology sport a Zacks Rank #1 (Strong Buy), Capella Education holds a Zacks Rank #2 (Buy).