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What: Shares of ITT Educational Services were getting sent to detention today, falling as much as 22%, after the educator agreed to pay Sallie Mae $46 million to settle a load dispute.
So what: Sallie Mae, the country's largest student lender, had alleged that ITT had failed to pay certain balances stemming from an agreement in 2007. As a result of the settlement, the educator will take an after-tax charge of $13.2 million, or $0.56 a share, in the fourth quarter of 2012. This morning, analysts at PAA Research also said ITT's liquidity position had become "increasingly challenged," and the company may violate leverage covenants by 2014.
Now what: With a market cap around $400 million, the $46 million settlement puts a serious dent in ITT's value, accounting for most of today's drop. Shares have tumbled this year, along with much of the for-profit education sector; ITT is now down nearly 80% from its 52-week high. But there's a considerable argument for shares being undervalued at this point. While the Obama administration has been cracking down on the sector, no one expects it to completely disappear, because these schools fill a void left by traditional colleges. Similarly, no one knows what reform measures are coming. A stock like ITT with a forward P/E of just 3.4 could easily bounce back.
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The article Why ITT Educational Services Shares Tumbled originally appeared on Fool.com.Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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