Education stocks have long been a safe haven amidst a troubled market, and Indianapolis-based ITT Educational Services Inc. is proving its worth with strong enrollment rates and growing revenue.

Analysts expect the company to fare well through 2009 despite lingering investor concern about students’ access to credit and the company's new internal lending program.  

Brandon Dobell, an analyst at Chicago-based William Blair & Co., said if not for the credit crunch, he would expect shares of the company (ESI) to be trading around 23 to 28 times earnings.  But, at $87, it still commands a healthy ratio of 18 times earnings.

“There are a lot of good things going on here,” Dobell said after the third quarter earnings conference call. He cited lower advertising costs, two strong quarters of new enrollment growth and a strong demand environment.

After the third quarter the company raised its full-year earnings expectations to a range of $4.90 to $5.00 per diluted share from a range of $4.65 to $4.75 per share. Analysts expect $4.99. For the full year 2007 the company reported earnings of $3.71 per diluted share.

William Blair rates the stock outperform. It recently raised its 2008 earnings estimate to $5.05 from $4.84, and raised the 2009 earnings estimate to $5.87 from $5.40.  

Chicago-based Morningstar Inc. rates the stock three stars out of five and estimates a fair value of $106.

Conventionally, enrollment in higher education gets a boost during times of economic instability. The current economic situation is certainly playing a role in ITT’s strong enrollment rates, and they may rise further from this fall’s financial turmoil.

Quarter-over-quarter, both new and total enrollment rates have been steadily climbing over the last few years at ITT’s schools, which now comprise 103 ITT Technical Institutes in 36 states. As the name indicates, the colleges have a strong technology focus, but also include business and health programs.

New student enrollment increased 19.4 percent in the third quarter ended Sept. 30, to 21,807 from 18,270 in the third quarter of 2007. Total student enrollment increased 14.7 percent to 61,556 as of Sept. 30 from 53,675 a year earlier.

“Historically, we have experienced above-average growth at our colleges during slow or recessionary economies because these periods motivated people to pursue additional education to learn new or upgrade existing skills in order to increase their employment prospects,” CEO Kevin Modany said during the third quarter earnings call.

However, Modany also said the schools were not experiencing an influx of students from the growing ranks of the unemployed. The average ITT Tech student is 26 years old and 80 percent of the students are working, he said.

Dobell explained that there might be a lag between a spike in unemployment rates and resulting enrollments. More significantly right now, he added, the job climate creates a fear factor that encourages people employed in unskilled jobs or coming out of school to seek further education.

Additionally, Dobell suggested that decreasing or stagnant subsidies for state and community colleges, caused by declining tax revenues, could drive students to choose for-profit schools such as ITT.  

With federal help, the company seems to have overcome earlier concerns that tightening credit markets would impair student loan access. This worry dragged down most for-profit education stocks last spring, ITT among them. The stock hit a 52-week low of $42.54 on March 28.  ITT responded to the credit squeeze by offering its own financing to its students.

In May Congress increased annual unsubsidized federal loan limits by $2,000 for undergraduates. The measure took effect in July, lightening the load that has to be covered by private or internal loans.

As a result of this change, ITT now expects private or internal loans to represent only 12 percent to 13 percent of revenue in the full year 2008, half its previous estimate of 25 percent.

“Our goal is to provide gap financing to students who would have received private loans in the past,” Chief Financial Officer Daniel Fitzpatrick said in an e-mail.

By giving direct funding to students who now fail to qualify for private loans, ITT takes on the risk of default and reserves a higher percentage of the loan amount than it had with outside loans.

The U.S. Department of Education’s most recent statistics show that proprietary schools have an average default rate of 9.7 percent. Fitzpatrick said ITT’s default rates, which ranged from 5.5 percent to 12.9 percent in 2006, compared favorably to similar institutions.

Over the last two quarters the company’s bad debt expense has increased by $13 million. Todd Young, an analyst at Morningstar, predicted bad debt expense for the full year, which has historically been around 2 percent of revenue, would rise to around 5 percent for 2008.

Still, he said, “I think from a business perspective it’s the best thing for them. … If they didn’t [offer internal loans] they would lose students, and that would be worse financially. They’ve got students who are qualified and willing, and they deserve an education."

While the business’s fundamentals are strong, the lending situation remains a focus for investors.

“Internally funded loans remains the biggest issue for the stock and likely will remain so for at least another quarter, probably overshadowing to a certain extent ITT’s very strong new student growth and margin leverage,” Dobell said in a research note.

Modany told investors on the earnings call that students did not face additional restrictions on access to private loans in the third quarter and he expected the situation to remain stable through the end of the year.