This Educational Stock Is a Cheap Buy

Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

ITT Educational Services(NYSE: ESI) stock was battered in 2012. After starting the year trading at $59.82, ITT's stock finished 2012 trading at only $19.29, a 67.8% decline. The company provides master, bachelor, associate and career-oriented education programs in various fields. This year, the stock has started showing signs of life again. It is currently up 20% year-to-date. The recent positive surprise in the company's quarterly earnings report helped to lift ITT's stock as the company beat analyst estimates by 11.9%. Will the momentum continue?

In its earnings call, ITT spoke about the main problem facing educational companies. Uncertainty surrounding the value of additional education has recently increased, with prospective students lacking confidence and putting off the decision to pursue additional education. For ITT, this trend has led to a 3.6% decrease in new student enrollment in the first quarter of 2013 as compared to the same period in 2012. Fellow companies report the same trend. Apollo Group (NASDAQ: APOL) reported an 11.5% decrease in net revenue, principally due to lower enrollment. Corinthian Colleges (NASDAQ: COCO) also recently reported that new student enrollment was down 5.7%, while DeVry (NYSE: DV) stated that new student enrollment declined 6.4%.

Examining the trends

Why does this happen? Education is expensive. Finding a new job is tough. Students fear that after spending money and time on education that they would not be able to cover the expenses. ITT has stated that the average annual salary reported by their 2012 graduates increased 2.5% to $32,609, as compared to the $31,820 average reported in 2011. To help combat uncertainty, ITT has started an opportunity scholarship program to help reduce the cost of education at its schools. The average debt balance for the entire duration of the study would be approximately $20,000 for an associate degree program, which is still a significant sum of money but it is 37.5% lower than the price of the same program before the scholarships began.

There is also rising competition from free online education startups such as Coursera and Udacity. These programs give students the opportunity to take different courses without having to pay for them. Coursera is also working with some universities to provide university credits for a payment. This means that if a person wants knowledge in a subject and is not interested in receiving an actual degree, they can choose the course they want and learn for free. The whole model is very fresh, and it is difficult to predict the impact that it will have on the education world. It is surely an option to consider for students that are on a tight budget.

Despite all the headwinds, ITT is making money. The stock has a 4.39 price-to-earnings ratio and an 8.32 forward P/E. The stock market puts more emphasis on the future rather than the present, so ITT's forward P/E is a more important metric. Apollo trades at an 8.47 forward P/E, DeVry trades at an 11.39 forward P/E and Corinthian trades at an 7.88 forward P/E. Of course, it’s important to mention that analyst estimates are often revised as the year progresses. Full-year 2013 earnings estimates for ITT have grown 3.8% during the last 90 days alone.

The bottom line

ITT currently operates at a 22.81% margin. Its competitors’ margins are lower, with Apollo having a 15.93% operating margin, DeVry having an 11.91% operating margin and Corinthian operating at a minuscule 3.57% margin. A bigger operating margin provides more flexibility for the company, meaning that ITT can afford more pricing experiments such as its scholarship program to try to gain more customers.

I think that ITT is a good investment. The stock is currently cheap and the company is actively taking steps to increase new enrollments. As the job market slowly shows improvement, more people will likely be willing to seek additional education to acquire the skills necessary to land higher-paying jobs. This will help all educational companies, and given its advantages will help ITT in particular.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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