We have maintained a Neutral rating on DeVry Inc. (DV), a provider of secondary and post-secondary education, following appraisal of third quarter 2012 results.
DeVry’s third quarter 2012 earnings of $1.00 per share were in line with the Zacks Consensus Estimate but down 24.2% from the prior-year quarter due to lower revenues. DeVry’s quarterly net sales fell 3.9% to $540.8 million from $562.7 million in the prior-year period due to sluggish student enrollments in the quarter, especially at DeVry University and Carrington Colleges. The decline in enrollment is the result of persistent unemployment, overall economic downturn and subsequent decline in student demand, heightened competition and modifications made to the business to comply with new regulations. Revenue declines in the business, technology and management segments were partially offset by top-line growth in the medical and healthcare segments.
Overall, we like the company’s diversified portfolio of academic programs which is the company’s largest competitive advantage. The company now offers a balanced portfolio of programs in the fields of business, healthcare and technology and also serves accounting and finance professionals. Diversification mitigates risk for the company while driving growth and attracting and developing talent across DeVry by offering a broader range of career opportunities.
Moreover, DeVry’s strategy of growing through acquisitions enables it to diversify into new program areas, levels and geographies and build high-quality brands to compete in an increasingly competitive market. DeVry also has a sound long-term debt-free balance sheet, which offers financial flexibility to the company to drive future growth and return value to shareholders through consistent dividend payments and share repurchases.
DeVry faces highly regulated industry conditions. The company is subject to risks relating to Title IV program integrity regulations. DeVry derives a significant portion of its revenues from federal student financial aid programs, referred to as Title IV programs, which are administered by the Department of Education (DoE). In order to be eligible for Title IV funds, the company has to follow certain extensive rules/regulations. These include maximum student loan default rates, maximum debt-to-earnings ratios of its graduates, limitations on the proportion of its revenue that can be derived from federal student aid programs, elimination of incentive compensation to admissions advisors, standards of financial responsibility and administrative capabilities. If the company fails to comply with these rules, its institutions may lose eligibility to participate in Title IV funds. Educational institutions are also increasingly under the scanner due to the rise in abuse of Title IV funds. DeVry’s institutions may lose their eligibility to participate in Title IV programs if their student loan default rates are greater than DoE’s standards.
The company has been witnessing a persistent decline in enrollments due to continued unemployment, overall economic downturn and subsequent decline in student demand (due to hesitancy to take on debt). The competitive landscape is also intense. Going forward, the company is expecting revenue to be down for fiscal 2012 and flat to slightly down in fiscal 2013.
In order to combat declining profits and student enrolment, DeVry has undertaken cost-saving initiatives like workforce reduction and cut down on discretionary spending. Other than that the company is also working on its marketing efforts to build brand awareness, making strategic acquisitions aimed at long-term growth, diversifying into new high demand education programs and investing in its people to deliver better quality service and education to its students. All these efforts are expected to bode well for a rebound on the other side of the sector-wide downturn.
At the end, we prefer to stay on the sidelines until we witness significant enrollment recovery, which will take some time for most education companies including DeVry.
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