ITT Educational Services (ESI) Stock Drops After SEC Announces Fraud Charges

NEW YORK (TheStreet) -- Shares of ITT Educational Services (ESI) were plummeting 35.8% to $2.58 on Tuesday after the Securities and Exchange Commission announced fraud charges against the for-profit college as well as its CEO Kevin Modany and CFO Daniel Fitzpatrick.

The SEC charges allege that ITT and the two executives fraudulently concealed the company's poor performance and the "looming financial impact of two student loan programs that ITT financially guaranteed" from the company's investors.

The two loan programs were created by ITT to off-balance sheet loans to students after the private student loan market collapsed, the SEC alleged.

"Our complaint alleges that ITT's senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed," Andrew J. Ceresney, Director of the SEC's Division of Enforcement said in a statement.

About 4.9 million shares of ITT Educational Services were traded by 12:04 p.m. Tuesday, well above the company's average trading volume of about 353,000 shares a day.

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 generally high debt management risk, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself."

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

  • The debt-to-equity ratio is very high at 2.38 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, ESI has a quick ratio of 0.66, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • 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 trails that of both the industry average and the S&P 500.
  • ESI's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 83.81%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • Net operating cash flow has decreased to $33.12 million or 35.58% when compared to the same quarter last year. Despite a decrease in cash flow of 35.58%, ITT EDUCATIONAL SERVICES INC is still significantly exceeding the industry average of -131.57%.
  • ESI, with its decline in revenue, underperformed when compared the industry average of 7.3%. Since the same quarter one year prior, revenues slightly dropped by 6.6%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: ESI Ratings Report
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