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Risk-Reward Balanced at DeVry

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On Nov 28, we maintained a Neutral recommendation on the for-profit education company, DeVry Inc. (DV), due to mixed first-quarter fiscal 2014 results announced on Oct 25.

Why the Neutral Recommendation?

DeVry’s first-quarter fiscal 2014 adjusted earnings of 22 cents per share missed the Zacks Consensus Estimate by a penny and declined 57.7% year over year due to higher operating expenses.

Revenues declined 6.0% year over year to $450.9 million as strong growth in the healthcare and international businesses was offset by yet another revenue decline at the struggling flagship DeVry University which accounts for half of the company’s revenues. Revenues, however, beat the Zacks Consensus Estimate of $446 million.

The company’s total post-secondary enrollments across all its programs were down 4.4% from the prior-year quarter. DeVry has been witnessing persistent enrollment declines, mainly at its flagship DeVry University, as a result of overall economic downturn and lack of student confidence in the employment market.

Though student starts were better than expected at DeVry University for the September session, they are expected to decline again in the November session due to business disruption related to government shutdown in October. Moreover, management expects weak enrollment trends and revenue decline at DeVry University to continue in fiscal 2014 as well.

However, we have faith in the company’s long-term fundamentals. Its diversified portfolio of programs, regular strategic acquisitions and a debt-free balance sheet 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 look impressive.

In order to revive enrollment growth, DeVry 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 400 corporate/government partnerships; of which many 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 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 substantial enrollment growth at DeVry University. The continued challenged regulatory environment also remains a persistent overhang.

Other Stocks to Consider

DeVry carries a Zacks Rank #3 (Hold). Better-ranked stocks in the education sector include ITT Educational Services Inc. (ESI) and New Oriental Education & Technology Group Inc. (EDU). Both the companies carry a Zacks Rank #1 (Strong Buy).

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