What does the DV quarter mean for the education sector and ESI?
What does the DV quarterly report mean regarding ESI and the education sector? DV shares are up a huge 20% after they posted results much better than expected for the second straight quarter.
1. Cost controls are having a large impact on the profitability of DV and the companies in the group. ESI has said in conference calls and presentations that it plans to cut $50 million out of its cost structure in 2013. With 23 million shares outstanding, that $50 million number represents over $2 per share in pretax earnings. With ESI shares now at $18, that cost saving figure looks huge when factored into ESI valuation. One of the reason Devry is up so much is because of cost cutting.
2. Devry and the other companies in the education sector remain solidly profitable. There has been much misinformation from the short sellers regarding how all the education companies were going to lose money. This is clearly not happening. ESI is solidly profitable (with the exception of the fourth quarter where they cleaned the decks of all the private student loan overhang). ESI was profitable in 2012 and will be so again in 2013.
3. The earnings of the education companies have enormous leverage and have the potential to come in well above estimates (which look overly depressed).
4. The share prices of the education companies can post massive short term price increases given their oversold, over-shorted condition.
5. As Devry discussed in its conference call, obtaining an education past high school level is an job requirement now for most jobs and the total payoff for that education is enormous over one' s career.
ESI continues to look like a solid long here. I am in the shares at below $12 and I am not selling. Upside is $60 with nay change in enrollment rates.