ITT Educational Services (ESI)




ITT Educational Services (ESI)

Conclusions: I think ESI is a good stock for invest. In the next analysis we can see that is a company that has:
  • Good management, which has increased earnings per share for over 10 years.
  • The financial condition is good and the probability that this company that this company continues without financial problems is high.
  • We expect a return on investment above 37%.

ESI Assessment



I used information from different sites to do the analysis of this stock.

Then I will describe the process that I do. For me to invest in stocks all the point points that I evaluated must be positive, if there are any negative I dismiss the stock. I think there are thousands of stocks and is sure is a sufficient number to find companies that complete all the criteria I think are important, so why hurry up and pick one that does not complete all, I prefer to find a stock which I feel comfortable at 100%

PER


The first step is to verify the PER.


The PER is the relation between the stock price and profits that generated.

I like to buy stocks with PER less than 15. In the theory articles we shall see a statistic that shows the average return depending PER. Because that I dismiss stocks with high PER.


On the other hand I like the current PER is lower than the average for the past 5 years.
On page http://www.google.com/finance?q=NYSE:ESI we can see the PER, as at 24/12/2010 was 6.11 so it fulfills part of the first criteria.

Then on page http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=ESI we can see the average PER of the last 5 years and these are
2009 12.90
2008 15.10
2007 27.30
2006 23.90
2005 21.80
Average = 20.20


We can see that the current PER is also lower than the average for the past 5 years. ESI fulfills the first criteria.

Debt


I like companies with low debt, I think a company should have to pay as much debt with earnings of 1 year.

A company with more debt will always have a competitive disadvantage and in addition to any financial crisis will have a greater chance of losing business. Looking for an investment horizon of long-term (5 - 10 years) it is important that the company be solid.
In http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=ESI can see that the ROE (Return on Equity) is 218% and also that the relationship between debt and equity (Debt / Equity Ratio) is 1.05, then dividing 1.05 / 2.18 we obtain the relation between debt and the Equity and is 0.48 ESI, less than one year.

Pay debt with earnings of just under 6 months, so ESI fulfills the second criteria.


Earnings per share growth rate:

To invest from the business point of view we assume that future earnings per share are predictable. So only select companies whose earnings per share were positive and predictable in the past.
In  http://www.google.com/finance?q=NYSE:ESI&fstype=ii we can see that the revenue and the net income grow during the last 4 years, and in the botton of the page we can see how the benefit per share increased by 191% in the last 4 years.

In the table"Earnings Per Share” in http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=ESI we can see how earnings per share were growing in all quarters.



ESI is fulfilling the criteria, so now look with more detail.

In http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=ESI we have the financial information of the last 10 years of ESI. From this we can see that the net profit margin increased from 7.9% in the year 2000 to 22.8% in 2009, which means that the company improved its competitive position.

We can also see the book value per share and return on equity over the past 10 years, these multiplying them we find the earnings per share over the past 10 years. Then the show:


Book Value/ Share
Return on Equity (%)
Earning per share
Año 2009
                              4,42  
192%
                              8,48  
Año 2008
                              4,49  
116%
                              5,20  
Año 2007
                              1,78  
216%
                              3,84  
Año 2006
                              2,53  
114%
                              2,88  
Año 2005
                              6,75  
36%
                              2,40  
Año 2004
                              5,11  
32%
                              1,64  
Año 2003
                              3,22  
40%
                              1,30  
Año 2002
                              1,97  
49%
                              0,97  
Año 2001
                              1,69  
43%
                              0,73  
Año 2000
                              1,38  
43%
                              0,59  


Here we see that the early per share grow at a rate of 30%.


Book Value/ Share
Return on Equity (%)
Earning per share
Simulating Earnings per share increased by 30% compared to year 2000
Año 2007
                              1,78  
216%
                              3,84  
                              3,68  
Año 2006
                              2,53  
114%
                              2,88  
                              2,83  
Año 2005
                              6,75  
36%
                              2,40  
                              2,18  
Año 2004
                              5,11  
32%
                              1,64  
                              1,68  
Año 2003
                              3,22  
40%
                              1,30  
                              1,29  
Año 2002
                              1,97  
49%
                              0,97  
                              0,99  
Año 2001
                              1,69  
43%
                              0,73  
                              0,76  
Año 2000
                              1,38  
43%
                              0,59  
                              0,59  


If recent years have reduced the rate I would taken the lower rate, but in this case the earnings per share increased to 34.5%
Book value per share (Book Value / Share) Return on equity (Return on Equity (%)) Earnings per share Simulating an annual increase of 34.5% compared to year 2000

Book Value/ Share
Return on Equity (%)
Earning per share
Simulating Earnings per share increased by 34,5% compared to year 2000
Año 2009
                              4,42   
192%
                              8,48  
                              8,45  
Año 2008
                              4,49  
116%
                              5,20  
                              6,28  
Año 2007
                              1,78  
216%
                              3,84  
                              4,67  


Take for analysis of earnings per share growth of 30%. ESI therefore fulfills the third criteria.

 Analysis of rate of return on investment in ESI

So ESI fulfill the 3 criteria. ESI is a company with:

  • Lower debt tells us not to have major drawbacks if a global crisis or year of low profits in the sector append. We seek to invest long term and is therefore important that the company we choose have a high probability that continue to operating if there are a financial crisis or the company has a temporary problem.

  • EPS predictable and growing: If earnings per share over the las 10 years, because they are not going to continue growing. This said that the direction of the organization take appropriate decisions and secondly that the company has a good competitive position in the market.
To evaluate I make a cash flow for the next 10 years and I do this in two ways. ESI pass the criterion of rate of return on investment if the IRR (internal rate of return) of both cash flow is greater than 24%.


  • Cash Flow 1) According to historical growth earnings per share rate
Buy / sell stock
Earning per share
Dividend
Cash flow
Año 0
-                         64,98  
                            10,63  
                                   -    
-                         64,98  
Año 1
                                   -    
                            13,82  
                                   -    
                                   -    
Año 2
                                   -    
                            17,96  
                                   -    
                                   -    
Año 3
                                   -    
                            23,35  
                                   -    
                                   -    
Año 4
                                   -    
                            30,36  
                                   -    
                                   -    
Año 5
                                   -    
                            39,47  
                                   -    
                                   -    
Año 6
                                   -     
                            51,31  
                                   -    
                                   -    
Año 7
                                   -    
                            66,70  
                                   -    
                                   -    
Año 8
                                   -    
                            86,71  
                                   -    
                                   -    
Año 9
                                   -    
                          112,73  
                                   -    
                                   -    
Año 10
                      1.465,44  
                          146,54  
                                   -    
                      1.465,44  
TIR



37%


In this case at year 0 we make the purchase of the shares, the day 24/12/2010 the price was 64.98 and we can see that in http://www.google.com/finance?q=NYSE:ESI or http://moneycentral.msn.com/detail/stock_quote?Symbol=ESI .


Earnings per share at that time was of 10.63.
 
After a year the benefit will have increased by 30% (assuming that the earning per share continue growing at a 30% rate), so that earnings per share will be 13.82. Since the company has a payout of 0%, the company pays no dividends, so the cash flow for year 1 is equal to "0."


So we calculate the profits and cash flow for 9 years.
In the year 10 will sell the shares. The selling price of 1,465 can be guessed, assuming a PER of 10.
Calculating the IRR gives a value of 37%. (IRR = internal rate of return is the rate that makes “0” the present value of cash flow)


  • Cash Flow 2) In return on equity
 
Buy / sell stock
Book value per share
Earning per share
Dividend
Cash flow
Año 0
-                         64,98  
                              4,46  
                              3,92  
                                   -    
-           64,98  
Año 1
                                   -    
                              8,38  
                              7,38  
                                   -    
                   -    
Año 2
                                   -    
                            15,76  
                            13,87  
                                   -    
                   -    
Año 3
                                   -    
                            29,64  
                            26,08  
                                   -    
                   -    
Año 4
                                   -    
                            55,71  
                            49,03  
                                   -    
                   -    
Año 5
                                   -    
                          104,74  
                            92,17  
                                   -    
                   -    
Año 6
                                   -    
                          196,92  
                          173,29  
                                   -    
                   -    
Año 7
                                   -    
                          370,20  
                          325,78  
                                   -    
                   -    
Año 8
                                   -    
                          695,98  
                          612,46  
                                   -    
                   -    
Año 9
                                   -    
                      1.308,45  
                      1.151,43  
                                   -    
                   -    
Año 10
                    21.646,92  
                      2.459,88  
                      2.164,69  
                                   -    
    21.646,92  
TIR




79%

In 0 we have to buy the shares. The price of books is of 4.46 and return on average equity for the last 10 years is 88% (the last year is 218% and to be more conservative we use the media for the last 10 years). Multiplying the price of books by the return rate gives us the earnings per share of 3.92 in this calculation, since we're using the average (in reality will be higher because the rate is 218 for the year 0) .
 
The company's payout ratio is 0%, so it does not pay dividends and reinvest everything, so that the price of books in the year 0 increases with the earnings of the year 0, so we have the price of books year for the year 1. If the company had paid dividends we would have discounted this value.
 
With the price of books in year 1 earnings per share estimate the dividend of year 1 and the price of books for the year 2. So continue in the same way fot the 10 years.

In 10 we will sell the shares, as have earnings per share of 2,164, assuming a PER of 10 the stock price will be 21,646.

This cash flow gives an IRR of 79%.

The payout data and price of books of the year 0 we can get in http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=ESI . The data return on average equity for the 10 last year we obtain http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=ESI table.

We use PER 10 for sales and I like to be prudent, after a few years, companies have less potential for growth and hence the IRR becomes smaller, I think 10 is an appropriate value for mature companies.
 
For deESI, I think the market is going to allow him to continue to grow as at present. Also making cash flows to 5 years have rates of 43% and 70%, they also have the third criterion.


Model 1)
Buy / sell stock
Earning per share
Dividend
Cash flow
Año 0
-                         64,98  
                            10,63  
                                   -    
-                         64,98  
Año 1
                                   -    
                            13,82  
                                   -    
                                   -    
Año 2
                                   -    
                            17,96  
                                   -    
                                   -    
Año 3
                                   -    
                            23,35  
                                   -    
                                   -    
Año 4
                                   -    
                            30,36  
                                   -     
                                   -    
Año 5
                          394,68  
                            39,47  
                                   -    
                          394,68  
TIR



43%


Model 2)
Buy / sell stock
Book value per share
Earning per share
Dividend
Cash flow
Año 0
-                         64,98  
                              4,46  
                              3,92  
                                   -    
-           64,98  
Año 1
                                   -    
                              8,38  
                              7,38  
                                   -    
                   -    
Año 2
                                   -    
                            15,76  
                            13,87  
                                   -    
                   -    
Año 3
                                   -    
                            29,64  
                            26,08  
                                   -    
                   -    
Año 4
                                   -    
                            55,71  
                            49,03  
                                   -    
                   -    
Año 5
                          921,74  
                          104,74  
                            92,17  
                                   -    
          921,74  
TIR




70%
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