ITT Saw Nearly Half Its Market Value Wiped Out Yesterday — Here's What Happens Next

Myles Udland

On Monday, shares of for-profit education company ITT Educational fell 46%. 

The meltdown in the stock came after ITT disclosed that a deal to sell nearly $120 million worth of real estate assets fell through. CEO Kevin Monday abruptly resigned on the news.

On Tuesday, shares of ITT were up about 0.6%.

Following the developments, Timo Connor, an analyst at William Blair, downgraded the stock to "Market Perform from "Outperform." 

Connor said in a note to clients following Monday's resignation that, "We do not believe this is evidence of fraud of impropriety... but with the company in a critical period, the lack of a committed senior leader at the helm may cause further fundamental challenges and downward earnings revisions."

It's been an ugly year for ITT, which has seen shares fall more than 75% this year. The stock also has a large outstanding short interest, indicating that traders are betting the share price will fall. According to data from FinViz, the percentage of outstanding shares being bet against currently stands at around 47%. 

In addition to the company's own struggles, the for-profit education space has been spoken about critically by investors including Mark Cuban and Jim Chanos, as well as regulators including New York Comptroller Thomas DiNapoli

In his note, Connor also laid out the five things he thinks happen next for the company.

1. Connor expects the company to file its delayed financial statements for last year in mid-August. Connor says the company has until September 15 to file these documents before seeking an additional credit extension from its lender, "so any delay beyond the next few weeks will be perceived as a negative."

2. The company will report results for the second quarter of 2014 after filing its delayed financials. Connor said the risk that ITT cuts its guidance is "substantial." Connor adds that the impact of bad press, as well as the CEOs departure, is "difficult to quantify."

3. Connor expects the Department of Education (DoE) to place the company on "heightened cash monitoring" at some point following the restatement. This would require ITT to post a $98 million letter of credit secured by its lender, Connor says.

4. The DoE could delay disbursement on ITT's federal student loans, but this is seen as "unlikely" by Connor, who notes that the DoE has only done this to one school since 2001. 

5. The DoE is set to release gain employment rules in November, and if the Department softens these rules, Connor says this could serve as a catalyst for ITT. If the rules are unchanged, Connor says ITT may need to cut prices, among other measures. 

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