Why ITT Educational Services (ESI) Stock Is Plummeting Today

NEW YORK (TheStreet) -- Shares of ITT Educational Services Inc. (ESI) are falling by 37.25% to $4.80 on very heavy volume in mid-afternoon trading on Friday.

The for-profit post-secondary educator said it received a notice that the SEC may take enforcement action against it, relating to its student loans, Bloomberg reports.

Last year, the SEC began an investigation into ITT Educational's loan programs after discovering accounting and disclosure issues. The company is currently in discussions with the SEC in an attempt to avoid an enforcement decision, an ITT spokeswoman told Bloomberg.STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

The SEC issued the company what is known as a "Wells Notice," which says the regulator may look into a cease and desist order, and issue fines. The notice is not a formal accusation but gives notice the SEC is recommending an action, MarketWatch reports.

Additionally, The Education Department has placed ITT Educational under heightened cash monitoring for failing to submit statements for 2013, and is auditing its administration of federal financial aid, MarketWatch noted.

The New York Stock Exchange also issued ITT Educational a warning that it may delist its shares for failing to file its annual report from last year, MarketWatch said.

Separately, TheStreet Ratings team rates ITT EDUCATIONAL SERVICES INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ITT EDUCATIONAL SERVICES INC (ESI) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Diversified Consumer Services industry. The net income has decreased by 21.9% when compared to the same quarter one year ago, dropping from -$9.47 million to -$11.55 million.
  • Net operating cash flow has decreased to $60.96 million or 29.60% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Looking at the price performance of ESI's shares over the past 12 months, there is not much good news to report: the stock is down 73.18%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • ITT EDUCATIONAL SERVICES INC's earnings per share declined by 19.5% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, ITT EDUCATIONAL SERVICES INC reported lower earnings of $2.53 versus $5.76 in the prior year. This year, the market expects an improvement in earnings ($2.85 versus $2.53).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Diversified Consumer Services industry and the overall market, ITT EDUCATIONAL SERVICES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: ESI Ratings Report

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