School's back in session, and for-profit educator ITT Educational Services (NYSE:ESI) is, too. After a heartbreaker of a first quarter, the company returned to its winning ways last quarter (until Q1, the firm had a streak of beating Wall Street estimates.) For Thursday's Q3 2006 report, analysts have set the bar high once again. Will ITT be able to clear it with its usual ease, or stumble once again?

What analysts say:

  • Buy, sell, or waffle? A full dozen analysts now follow ITT. Seven rate it a buy; three say hold; and two counsel selling the stock.
  • Revenues. On average, they expect to see 11% sales growth to $195.6 million.
  • Earnings. And 15% profits growth to $0.75 per share.

What management says:
CEO Rene Champagne pronounced himself "very pleased" with ITT's performance in Q2, characterizing it as "solid." Looking forward to Thursday's results, he observed that "strong interest . continued to be expressed in our programs . as we began the third quarter of 2006."

Such interest doesn't come at no cost, of course. COO Kevin Modany noted that advertising spending that was 19% higher than in Q2 last year helped to support "a significant increase in leads." According to Modany, the bulk of the cash was spent to support newly opened campuses, as opposed to ramping up advertising of existing ITT schools. And campuses aren't the only new things popping up at ITT. As previously noted, the company continues to expand course options and add new programs of study both at the bachelor and associate degree levels, with much attention being given to the firm's School of Health Sciences.

What management does:
All the new options have helped ITT to continue expanding slowly but surely, with year-to-date revenues up 10% over the first half of last year. But the investments are having the expected impact on margins as well -- rolling gross and operating margins have both been falling over the last year, and the pressure finally made itself felt on the rolling net last quarter.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Turning to the income statement to see why this is so, we can calculate that both cost of services (typically abbreviated "COGS," which is subtracted from revenues to determine a firm's gross profit) and selling, general, and administrative expenses ("SG&A," which when added to COGS determines the company's operating profit) are growing faster than sales. COGS has been up 13% in comparison to the first half of 2005 for ITT, while SG&A has risen a more moderate -- but still faster than sales -- 11%.

While neither of these discrepancies looks particularly outrageous, the crimping of margins means that ITT is not getting the fullest possible benefit from its continued growth. Ideally, therefore, we'd like Thursday's news to show that the company is able to grow its revenues disproportionately faster than its advertising and expansion costs for a change. Either this, or that ITT has cut back on its costs but is growing just the same.


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Fool contributor Rich Smith does not own shares of any company named above.