For-profit education is a great business that has been broadly sold off over the past month or so. The reasons for this are cloudy, to be sure. Industry leader Apollo Group (APOL) announced an informal SEC inquiry, and widely read trade publications like Barron's and Bloomberg have run negative articles on the industry. 3 of the top publicly traded for-profits are all currently on the Magic Formula screen (ESI, APOL, and Corinthian Colleges - COCO). It seems like an irrational sell-off. All of these companies are growing sales, profits, and enrollments by 20% or more, as high unemployment has driven many thousands of people back to school to improve their education. In ITT's case, sales grew 34% and net profit 50% year-over-year in the just completed third quarter. For 2010, the company is expecting another 25% increase in sales and profits. This puts ITT's forward earnings yield at 16%, which is extremely cheap for the quality we are buying here.

This is a company that squarely meets the 3 points of investment: growth potential, competitive positioning, and financial strength. Growth will not be a problem over the near to mid-term. Over the next couple of years, higher enrollments due to high unemployment will boost margins. ITT continues to expand by opening new centers (6-8 a year), adding new programs (over 250 in 2009), and increasing tuition along with public schools (3-5% a year). The company has also shown a desire to growth through acquisition, such as the Daniel Webster purchase. Analysts forecast 17% annual profit growth over the next 5 years - quite healthy. I think it could do better than that.

From a competitive standpoint, all for-profit education providers enjoy great business advantages. These companies operate lean cost structures, but set tuition based on higher-cost traditional schools, which have to pay for services like dorms, food, sports, and so forth. Since government financial aid limits are set for these traditional schools, for-profits enjoy juicy operating margins over 25%.