For your run-of-the-mill undergraduate, college is a four-year affair. Sure, more and more often, layabouts and scions of the wealthy are stretching their "real world reprieve" to five or six years. And, on rare occasion, a particularly ambitious student will work to graduate in three years. It's practically unheard of, however, for a student to "accidentally" earn enough credit to graduate in three years. Yet that's just what for-profit college ITT Educational Services (NYSE: ESI) has done.
Much to its (happy) surprise, ITT learned that the Department of Justice (DOJ) -- more specifically, the U.S. Attorney's Office for the Southern District of Texas -- has closed its investigation into numerous allegations of wrongdoing at the company. And while ITT only learned last year that it had even been signed up for this particular course, it turns out that the DOJ has been investigating ITT for three years.
Final exams were held on Feb. 24, 2004, when federal agents raided ITT's Indianapolis headquarters and 10 branch campuses. And while it took an inordinate amount of time to grade the papers, it seems that ITT passed its test. In a brief letter sent to ITT's outside counsel on Friday, the DOJ confirmed that three years of investigating have not "revealed evidence sufficient to continue the designation of ITT, or any of its senior management ... as targets or subjects." Albeit the final paragraph of the letter leaves open the suggestion that some low-level employees may still be at risk of prosecution, the company proper seems to be in the clear.
Upon hearing the news, investors threw their caps in the air and caution to the wind, buying ITT stock with abandon and driving the share price up more than 12% in Monday trading. Stocks of for-profit educating peers such as Apollo Group (Nasdaq: APOL), Career Education (Nasdaq: CECO), DeVry (NYSE: DV), Laureate (Nasdaq: LAUR), and Strayer (Nasdaq: STRA) rose in sympathy, up a few percentage points each. Notably absent from that list was Corinthian Colleges (Nasdaq: COCO), which shook off its own legal troubles earlier this year. Sadly for Corinthian investors, the company had issued an earnings warning on Thursday.
Now for the bad news: ITT's exoneration has officially been priced into this stock, and as of today, the company no longer looks undervalued. As I wrote back in July of last year, the threat of federal criminal prosecution had ITT selling at a significant discount to its fair value at that time. That's no longer the case. The company currently sports a price-to-free cash flow (FCF) ratio of 29 and, even with a strong balance sheet loaded with nearly $350 million in cash and no debt, ITT looks fairly valued, or even slightly overvalued, based on consensus analyst estimates of 20% long-term earnings growth.
For more on why ITT looks so good, whatever its stock price, read:
Fool contributor Rich Smith has no financial position in any of the companies mentioned in this article.
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