ITT Educational (ESI) Reports Q2 Earnings, Revenues Lag

Educational Services, Inc. ESI reported earnings per share of 18 cents in the second quarter of 2016, as against the Zacks Consensus Estimate of a loss of 4 cents. Moreover, the bottom line increased 500% from 3 cents earned in the prior-year quarter due to strong margins. The results were driven by an improvement in bad debt ratio, improved persistence and lower taxes.

The company reported revenues of $176.3 million, which missed the Zacks Consensus Estimate of $180 million by 2.1%. Revenues fell 17.7% year over year due to a decline in enrollment levels.

Total enrollment of 40,015 students was down 16.4% year over year owing to declines in continuing students and new student enrollment, partially offset by improvement in persistence rate.

New enrollment declined 21.6% year over year to 9,910 students, owing to a challenging recruitment system and marketing strategies.

Continuing students declined 14.6% year over year. However, persistence rate increased 70 basis points (bps) to 69.5%, owing to an improvement in students' retention.

Operating margin increased 210 bps to 7.5%. As a percentage of revenues, bad debt expense moderated 20 bps to 4.3% during the quarter owing to the company's cost control efforts.

Outlook

The company does not expect the enrollment scenario to improve in the rest of 2016, owing to changes in its marketing and recruitment practices. In fact, the company lowered its new enrollment guidance. For the second half of 2016, the company expects new enrollment to decline in a range of 45% to 60%. This will result in new enrollment decline of about 30% to 40% in fiscal 2016, wider than the prior expectation of 15% to 20% decline. However, retention rates are expected to remain flat in the back half of 2016.

However, given its ability to control costs, the company raised its guidance for earnings before interest, taxes, appreciation and amortization (EBITDA) for 2016. EBITDA for fiscal 2016 is now expected to range between $110 million to $125 million, higher than the prior expectation of $55 million to $75 million.

ITT EDUCATIONAL Price, Consensus and EPS Surprise

ITT EDUCATIONAL Price, Consensus and EPS Surprise | ITT EDUCATIONAL Quote

ITT Educational Services has a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the consumer discretionary sector include Apollo Education Group Inc APOL, New Oriental Education & Technology Group Inc. EDU and Barnes & Noble Education Inc BNED. All the three companies hold a Zacks Rank #2 (Buy).

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