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ESI Stock: Don’t Buy Into ITT’s Knee-Jerk Rally

We'll see how long this rally lasts.

ITT Educational Services, Inc. (NYSE:ESI), an operator of technology-focused for-profit colleges, released its audited annual report for fiscal 2014 on Friday, and Wall Street couldn’t have been happier.

ESI Stock price Audited 2014 Earnings Released itt educational services inc ESI stock went absolutely bonkers after the results, and at one point shares were up as much as 90% in intraday trading. While the company beat on both earnings and revenue, what really got shareholders excited was an indication that ITT Educational Services won’t need to operate with “further oversight” from the Department of Education.

It’s a dramatic change in momentum for ESI stock; before today’s incredible session shares were off 87% in the last year alone.

Let’s take a gander at the numbers and see what’s responsible for today’s incredible pop.

ESI Beats Earnings, Revs, Avoids Federal Scrutiny

For fiscal 2014, ITT Educational Services reported revenue of $961.8 million and earnings per share of $1.23, easily surpassing consensus expectations for $953.4 million and $1.02, respectively.

Although revenues fell 10.3% from 2013 to 2014, ESI swung back to a profit, posting a net income of $29.3 million after losing $27 million the year before.

That said, the number that investors cared most about today was the 2.0 composite score ESI believes it attained by posting these audited financials. A composite score is a number assigned by the U.S. Department of Education, and if it’s under 1.5, the Feds won’t let you operate without “further oversight,” including “cash monitoring and other participation requirements.”

Given what watchful regulatory scrutiny has meant for this industry before, I can understand why shareholders were relieved…

After all, today’s meteoric gains come just weeks after the Securities and Exchange Commission said ITT’s chief executive and financial officers knowingly attempted to conceal the disappointing performance of its home-grown loan portfolio. ESI stock fell more than 40% on the news.

From where I sit, I don’t much care that ESI stock is roaring higher today. I wouldn’t touch this thing with a 10-foot pole.

This industry will still face extreme regulatory scrutiny, even if ESI’s composite score helps the company lose some heat for a while. The industry, frankly speaking, is riddled with black eyes and bankruptcies.

InvestorPlace Contributor James Brumley recently noted one company in particular that embodies many of the industry’s endemic risks:

“Take Corinthian Colleges Inc. (OTCMKTS:COCOQ) as an example. In mid-April the Department of Education fined the for-profit school $30 million for making a total of 947 misrepresentations regarding graduates’ job prospects. On May 4, Corinthian Colleges filed Chapter 11 bankruptcy, accelerating plans to wind down its entire operation.”

Does that sound like something that would be happening in a normal, healthy industry? Incessant legal trouble with the Feds, fraud and finances are red flags in my book.

And Corinthian isn’t the only bad apple in the area. The University of Phoenix — the flagship of Apollo Education Group Inc (NASDAQ:APOL) — came awful close to losing its accreditation back in 2013. While it remains accredited, “The Phoenix” has just 213,000 enrolled — less than half its enrollment from five years ago.

The fact that ESI stock is on this incredible run today belies the fact that the industry is in a secular — and in my opinion, irreversible — downtrend. I don’t care if we’re talking ESI, Strayer Education Inc (NASDAQ:STRA), Bridgepoint Education Inc (NYSE:BPI) or American Public Education, Inc. (NASDAQ:APEI) — if you’re in the business of for-profit education, you’re on thin ice with the Obama administration.

If a single one of these stocks is higher a year from now than it is today, I will be absolutely shocked. Please don’t be tempted to get in ESI stock today.

Instead, if you’re a shareholder, take this opportunity and sell today.

Although a believer in the many-worlds theory, no world exists in which John Divine owns any of the stocks mentioned. In this world, you can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/esi-stock-itt-educational-services-earnings-release/.

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