ITT Educational Services (ESI)’s Equity Is Worthless – PAA

Please Act Accordingly (“PAA”) has a new report out on ITT Educational Services (“ESI”), asserting that the equity is worthless. ITT Educational Services is a for-profit secondary education provider that is currently in the midst of a period of uncertainty. It has numerous obstacles to overcome related to its failed off-balance loan programs, PEAKS and CUSO. However, the assets of ESI are most likely sufficient to support debt and ongoing operational working capital needs for the foreseeable future. PAA may be looking out two or three years, especially considering that last year PAA put out a report on ESI with a target price at $2 only to see the stock soar to over $14 per share in a matter of days following PAA’s report.

ITT Educational Services (ESI) Equity Is Worthless - PAA

PAA’s valuation target for ITT Educational Services

PAA’s valuation target revolves around three potential variables. First, that Cerberus, ITT Educational Services’ main lender, will force ESI into bankruptcy in a loan-to-own strategy. This may seem viable, however, Cerberus has so far agreed to 3 amendments to the original loan agreements in under 6 months since the loan was made. These actions do not seem consistent with a lender looking to push a company into bankruptcy.

Second, PAA believes that regulatory actions, most likely related to military and veteran funding, will be halted and that such actions will negate ITT’s ability to comply with the 90/10 rule for government funding related to secondary education. Investors in this space might recall that the Department of Education effectively “forced” Corinthian Colleges into bankruptcy through increased cash monitoring steps. Given the fallout from this action, it might not be likely that regulators force another for-profit school to leave approximately 50,000 students without a path to finish their education.

Third, PAA believes the long, slow bleed of decline in attendance will not allow for ITT Educational Services to right-size its business in a dramatic enough fashion to remain cash flow profitable. This may be the most likely reason for a possible equity donut, however, for-profit schools have shown a tremendous ability to cut costs and remain profitable in the face of declining student attendance and revenues.

Currently, ESI is priced as if it is going out of business. Only time will tell if this turns out to be a classic Ben Graham cigar-butt with one last puff or an eventual equity donut.

The author of this post has no position in the company