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ITT Educational Services (ESI) Downgraded To 'Sell' By Deutsche Bank, PT Cut To $50

 March 01, 2012 09:09 AM

Deutsche Bank (DB) analyst Paul Ginocchio downgraded rating on shares of ITT Educational Services, Inc. (NYSE:ESI) to "Sell" from "Hold" for both cyclical and structural reasons. The brokerage lowered its price target on shares of ESI to $50 from $66.

Ginocchio downgraded the stock due to concerns about new enrollment trends due to the improving labor market, and the belief that ESI over time has to continue to effectively lower tuition prices due to a more price sensitive student. With the stock up 20% YTD, despite yesterday's 5% decline, he believes it is an opportune time.

The analyst's previous belief was that the second half of 2012 trends for ESI's new enrollment would benefit from the cycling of the effective shut down of ESI's criminal justice program, which will create 12pts of headwind for ESI through Q2.

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Now with the significant drop in initial claims and its 61% correlation with new enrollment, Ginocchio has lowered the second half of 2012 expectations. He believes lower level degrees (certificates, associates) are more cyclical than higher level degrees, which was corroborated by his Google keyword search trends.

In 2011, the analyst believes that 40% of ESI's EPS was generated from its premium tuition price. At DV's tuition levels (15% below ESI's currently), he estimates that ESI's 2011 EPS would be about $6.40, not the $11.12 reported (EBIT margins of 20% versus 34%).

As students become more price sensitive over time, Ginocchio believes ESI will have to continue to lower price to grow enrollment. Low enrollment growth and declining prices means low or no EPS growth long-term, in his view. Finally, if the Republicans win and cut Pell funding, ESI then has debt-to-income issues.

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The brokerage lowered 2012 and 2013 EPS by 1% and 9%, respectively, due to lowered new enrollment expectations.

ESI closed Wednesday's regular session up 0.51% at $68.64.



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