Analyst: Feds’ new rule may not sink ITT Educational, peers

Shares of for-profit education companies—including Carmel-based ITT Educational Services Inc.—ended higher on Tuesday as a William Blair analyst said a long-awaited "gainful employment" rule from the Department of Education likely won't hurt vocational school chains as much as investors might think, and the recovering economy will make it easier for schools' students to repay their debt.

Lobbying efforts from the schools have delayed the release of gainful employment's definition. The complicated rule is expected to link the schools' access to federal financial aid—which can make up as much as 90 percent of their revenue—to their students' debt levels and ability to repay student loans.

Graduates whose debt loads are too high or schools with too few students repaying student loans could be cut off from access to government-backed loans.

Shares of for-profit school chains have been hammered over the past year as regulatory scrutiny of their recruitment and enrollment practices has intensified.

But analyst Brandon Dobell said in a research note Tuesday that he thinks once details are hammered out, the rule will take longer to implement than investors have feared, which will lessen the hit to schools' bottom line. He also thinks that the risk of not meeting the requirements will deter traditional schools from opening up vocational arms, and will cull smaller players from the field, which would benefit big vocational school chains such as ITT Educational.

Investors have been expecting the new regulations to hit those chains harder than schools that focus on pricier B.A. and graduate degrees, such as Strayer Education Inc. But Dobell thinks the rules will actually reduce competition for the larger chains, potentially generating "a big tailwind for growth" at ITT, Education Management and DeVry, as well as for some programs at Career Education.

Dobell also expects the gradual recovery in the credit markets will open up more opportunities to offload ITT's risk than the market currently expects, and an improving labor market will mean better placement for the schools' students, as well as better salaries, repayment rates and debt-to-income ratios.

ITT shares rose $3.20, or 4.8 percent, to close at $70.13; DeVry stock gained $2.31, or 4.5 percent, to $53.96; and EDMC shares added $1.31, or 6.3 percent, to finish at $22.19. CECO finished up nearly 4 percent at $21.96.