"Allegations of massive fraud aside, ITT looks good." How's that for the mother of all disclaimers? Still, it's the impression one gets from reading over for-profit educator ITT Educational Services'
The company remains under investigation by the Department of Justice, the California Attorney General, and the Securities and Exchange Commission, but devoted just two paragraphs of its earnings statement to discussing the matter. Paraphrased, what ITT said was basically this: We formed a committee and ran an investigation and, wouldn't you know, we couldn't find a darn thing wrong. Sounds like, if any dirt is to be dug up on ITT's alleged fudging of its enrollment figures and employment placement rates, the regulators are going to have to dig it up themselves.
Meanwhile, on the earnings front, things were coming up roses. Compared to the year-ago quarter, ITT posted 15% GAAP and 53% pro forma (Latin for "if wishes were fishes") per-diluted-share earnings growth. That's in marked contrast to the news received by Corinthian Colleges
On the other hand, Fools know better than to rely just on GAAP earnings to measure a company's real profitability (and as for pro forma earnings, those are just so 1999). While it's true that ITT achieved double-digit year-on-year profits growth for the third quarter and for the first three quarters of 2004, its free cash flow rose just 3% in the third quarter, and has actually declined over the past nine months.
So what we end up with is this: growth in GAAP profits, offset by a free cash flow decline, plus a passel of shareholder class action lawsuits and the looming risk of government fines. For the market to add all that up and come to the conclusion that ITT is 10% more valuable today than it was yesterday morning, Wall Street must be grading on a curve.
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Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
