The Fall Of For-Profit College, (ITT)

     The ITT Educational Services Management Q3 2012 Results are out.  This is a company that has experience a great deal of volatility in recent years due to the for-profit college sector taking some hits from federally funded investigations.  As a result of Senator Harkins report which came out in Q2, the ESI stock value has dropped significantly.  Right now it seems as though the bottom has been reached, but with announcements by major investing firms proclaiming that they are done investing in the for-profit college arena, the bottom could still be over the horizon. 

            In the Q3 report Kevin Modany lays out a plan to keep the money rolling in, while attempting to change very little about how the Company operates.  The plan is to give the students a better understanding of the financial commitment they are about to enter into.  In essence the plan is to better inform the student about the expenses they will not incur due to Pell grant, and scholarship money.  If you ask me, (and of course no one is asking me), this sounds like something that should have been included in their practices anyway, and I find it hard to believe that they didn’t.  So, either this was huge oversight or there is a catch?  Without attempting to predict the future, I would assume that the new plan is actually at its core, a recruitment strategy which will focus on the lending, or out of pocket expenses the student may be responsible for, which will be displayed as a discounted number based upon various eligibilities.  Quite frankly, this sounds like another scheme that will only cause more problems for this institution than returns. 

            In the “ITT Educational Services Management Discusses Q3 2012 Results – Earnings Call Transcript”, the new plan entails 20 ITT locations which have been selected to be market test sites.   Apparently the idea is; when the market research is concluded Kevin Modany, and his staff will make a decision on whether the plan was successful or not.  If success were achieved the new plan will go into effect immediately across the board.  If this plan were to show lax, or negative results, then what?  “Then what”, is the operative question, and it is surprising to me that in the Q & A portion of this teleconference that question was not raised.  Since that question was no asked we have to consider only two possible reasons.  One; the thought didn’t cross the mind of these key-players on Wall Street, which is unlikely. Or two; they don’t care about contingency plans for a company which is showing poor performance in the stock market.  In both cases, you have to admit that the investors asking the questions may have failed to see something here.  

            Here are some of the questions asked by investors during the Q & A.



“On the kind of strategic plan side, I guess 2 things. First of all,, obviously, there’s a big difference between a $45,000 cost and a $27,000 cost, but the $27,000 is still above what students can get at community colleges. So what gives you confidence that, that will make the difference? And secondly, I realized it’s too early to say what the impact would be if you do rollout enough scholarships that you wouldn’t need the third-party private loans anymore, but I was hoping you could just at a high level talk us through kind of what the impact would be on revenue cost, bad debt, that sort of thing.”

Corey Greendale – First Analysis Securities Corporation, Research Division



“Two questions if I could. The first one, it sounds to me like the right thing to do to consider this. I wonder why you don’t just cut price. You’re still going to have the blist price in some of the DOE disclosures. You’ve got a lot of room on 90/10. It would clean up the accounting with less lending to students and make the net income much closer to cash flow. It just seems to me like it would be cleaner and you’d probably get a bigger boost. And then the second question, would just love a little more color on the weaker repayment performance. Can you give us a sense how much that’s been? And if that trend continues ultimately, have you reserved enough? Or what does it mean for the financials?”

Gary E. Bisbee – Barclays Capital, Research Division



“I appreciate the comments about demand levels being high, but the shortness or the declining conversion rates, it — isn’t that — where are they falling out? And I guess my question is, are they in fact falling out because of price? And if it is price, isn’t that enough evidence to make the move? And maybe just to expand the question a little bit more than that, from a shareholder perspective, the stack seems to already be reflecting a very heavy discounting effect. And I’m wondering strategically if there’s something that you guys have thought about that would enhance not only the value to the student but also to the shareholder?”

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division



          As you can see in all three of these questions there is a focus, (and I would say a concern with) ESI’s current model.  There were in fact several other questions which addressed perceived failures in the current model as well.  These concerns are not just held by the shareholders, but also by the students who stay on top of these issues. 

        We know that the sudden drop in share value came as a direct result of Senator Harkins report/s.  Since it seems the reports have aroused awareness in both the investors and the students.  Adding to the recruitment strategy may only exacerbate the problems.  You also have to consider the types of questions which were asked.  Nearly every question seemed to be a directly related to the “Senate report on for profit colleges”.  How does Modnay expect to regain the trust of the students, and the investors, if he plans on using the exact same strategy?  Since when has that ever been the best course of action for a corporation facing tough times.  Staying the course, may sound valiant, but you only stay the course to weather the storm.  Right? Gentlemen the storm is over, and you are still sinking. 

         Let’s think about this from an investors prospective.  Investors like quick returns that is why the Tech sector is great for payoffs.  If investors are in for a long term derivatives they tend to stick to companies on a slow rise, which will prove to be worthwhile after several years.  ESI has been on a slow rise for over a decade, until Q2 2012.  Now ESI stock is bouncing around at its starting point from 1998.  If I were investing into ESI, I would want to see plans for a Hail-Mary-Pass right about now, so I can get back on board, and ride the wave to the top.  Unfortunately this company has decided to continue the policy and regulation war it has been waging against the federal government for the past several years.  That war is over! ESI lost! 

         Consider how other corporations have handled bad publicity in the past, and what it took to dig out of the hole.  Wal-Mart, Sears, and even McDonalds have experienced volatility due to consumer awareness, and in most cases they have overcome the awareness issue, by changing their policies to, (in a sense) pacify the customers.  If your customers are unhappy, your shareholders will run. 

    It doesn’t take a rocket scientist to know that if your customers are unhappy you will experience shifting margins.  If you take a look at the success rates of the organization as a whole, you will notice that the graduation rate is very low.  Also, the loan default rate is among the highest in the industry.  You can assume that the majority of the students in default, and also the students whom failed to achieve a degree through ITT, are most likely unhappy with their experience at ITT.  Take into consideration the number of students ITT has served over the years.  If you go to the ITT Tech Wiki page, about half of the page is dedicated to controversies surrounding this company, and the latest senate reports haven’t been added yet. (  We live in a viral information age right now, which can boost the hell out of a company, or destroy it overnight.  Word of mouth spreads faster now than any time in history.  It is essential that business owners, and corporations know this, and are prepared to combat it.  Preparedness has never been more necessary, which ESI has failed to account for.

      Another site known as “”, hosts hundreds of dissatisfied students and staff. 


      If you search “ITT Tech complaints” on the internet, you will find dozens of message boards just like, absolutely overloaded with complaints.  This means that the amount of negative content concerning ITT Tech is very likely a cause of the problems at hand.  I see a huge oversight on behalf of the investors, and Mr. Modany, to address this issue, and perhaps even titillate a few strategies to thwart it too.

    So let’s do a quick recap; the majority of students aren’t happy.  Many staff members are not happy.  The shareholders no longer trust the ESI market performance.  The U.S. Government has scrutinized ITT’s ethics in business.  The questions being asked all reflect these same concerns.  The internet is flooded with anti-ITT, message boards.  And finally, the plan to fix all of this is to focus on how the school presents the dollar amount to the student during pre-enrollment meetings. 

      Amid schools like the University of Phoenix, which are collapsing before our eyes.  UofA, is closing campuses, and cutting staff, they are in a state of damage control.  ITT is experiencing the same fate as UofA, yet their damage control measure includes doing market research employing one strategy, which by the way proves how incompetent their leadership is.  When you have hundreds of campuses, which are perfect for doing market research, and you chose to only test one possible fix to a sinking ship with several gaping holes?  Something is amiss in Indianapolis my friends.

     I look at it this way; within the next few quarters, if this single, rather minimal attempt to fix a sinking boat doesn’t pan out, we should be expecting a Hail-Mary-Pass, or a Last-Ditch-Effort to keep this Galleon afloat.  Although, I will say it again, it looks to me like the Captain is going to scuttle the ship. 



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