DeVry Kept at Neutral

Zacks

On May 31, we maintained a Neutral recommendation on the for-profit education company, DeVry Inc. (DV), despite disappointing third-quarter fiscal 2013 as we have faith in the company’s long term fundamentals.

Why the Neutral Recommendation?

After delivering solid results in the first two quarters of fiscal 2013, DeVry’s third-quarter results (announced on Apr 23) were somewhat disappointing. The company beat earnings but missed out on revenues as the improving new enrolment trends seen in the past two quarters could not be sustained.

DeVry’s third-quarter fiscal 2013 adjusted earnings of 90 cents per share beat the Zacks Consensus Estimate of 83 cents by 8.3%. Lower operating expenses drove the earnings beat despite the top-line decline. Earnings, however, declined 10% from the prior-year quarter due to lower year-over-year revenues.

DeVry’s quarterly net sales fell 5.9% year over year to $509 million largely due to weak enrollment growth, especially at the flagship DeVry University. Revenues also missed the Zacks Consensus Estimate of $517 million.

The company’s total post-secondary enrollments across all its programs were down 6.7% from the prior-year quarter. In-fact, enrollments have declined across the entire higher education system in 2012 in the U.S. New enrollments also declined 6.4% in the quarter, much weaker than a positive growth of 5.6% in the second quarter. Enrollments declined significantly at the flagship DeVry University as a result of overall economic downturn, continued unemployment and lack of student confidence.

Encouragingly, however, the company increased its fiscal 2013 cost savings target from $80 million to $100 million. In fact, the cost savings target has now been increased for three consecutive quarters.

We have faith in the company’s long term fundamentals. Its diversified portfolio of programs and regular strategic acquisitions give it a competitive advantage.  The company is also seeing continued strength in its healthcare and international businesses. Moreover, the performance-improvement plan to align costs, regain enrollment growth and make growth investments looks impressive.

In order to revive enrollment growth, the company is working on its marketing efforts to build brand awareness; building relationships with high schools, community colleges, corporations and government/military institutions; improving its technology; and improving affordability through scholarships and pricing. DeVry University has over 200 corporate/government partnerships; 150 are with Fortune 500 companies like Wal-Mart Stores Inc. (WMT). As part of its turnaround plan, DeVry has also undertaken cost-saving initiatives like workforce reduction and has curbed discretionary spending in order to combat declining profits and decreasing student enrolments. DeVry is also making targeted investments to drive future growth like opening new campuses, diversifying into new high-demand education programs and investing in its faculty.

We, however, prefer to remain on the sidelines until we see improving enrollment trends at DeVry University. The continued challenged regulatory environment also remains a persistent overhang.

Other Stocks to Consider

DeVry carries a Zacks Rank #3 (Hold). Other education companies worth a look are New Oriental Education & Technology Group (EDU), carrying a Zacks Rank #1(Strong Buy) and Grand Canyon Education, Inc. (LOPE) which carries a Zacks Rank #2 (Buy).

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