Recently, Steven Cohen has filed a 13G filing to disclose his passive stake in ITT Educational Services, Inc. (NYSE:ESI). He accumulated more than 1.23 million shares in the company, equivalent to around a 5.3% stake in the company. Since the beginning of the year, ITT Educational Services, Inc. (NYSE:ESI) has gained nearly 55% on the market, much higher than the S&P 500’s return of only 15.23%. Should we follow Steven Cohen into ITT Educational Services, Inc. (NYSE:ESI) at its current trading price? Let’s find out.
ITT Educational Services, Inc. (NYSE:ESI), incorporated in 1946, is one of the leading providers of post-secondary degree programs in the U.S., having around 61,000 students with 147 campuses and two learning sites in 39 states. Around 40% of the students were at least 31 years old, while the students from 25-30 years old accounted for 29% of the total student number. In the past five years, ITT Educational Services, Inc. (NYSE:ESI) has experienced fluctuating performance in both revenue and net income. In 2012, the company generated nearly $1.29 billion in revenue and $140.5 million in net income, or $5.88 per share.
What I like about ITT Educational Services, Inc. (NYSE:ESI) is its ability to generate free cash flow. Since 2003, ITT has generated consistent positive, but fluctuating, free cash flow, fluctuating in the range of $74 million to $996 million. In 2012, with the operating cash flow of $244 million, ITT’s free cash flow came in at $160 million. However, what I worry about with ITT is its not so strong balance sheet. As of March 2013, it had $663 million in equity, $483 million in cash and no debt. However, it booked $330 million in pensions and other benefits and as much as $758 million in goodwill and intangible assets. Consequently, ITT had a negative tangible book at $(95) million.
ITT is trading at around $26.80 per share, with a total market cap of $626.5 million. The market values ITT at around 10.8 times its forward earnings. Compared to its peers Apollo Group Inc (APOL) and DeVry Inc. (DV), ITT is the smallest company among the three. Apollo Group Inc (APOL) is the owner of several educational subsidiaries, including The University of Phoenix, the Institute for Professional Development and the College for Financial Planning Institutes Corporation. The acquisition of Carnegie Learning in 2011 has help Apollo to incorporate adaptive learning into its academic platform and improve the retention and graduation rates.