DeVry’s Long Term Prospects

Disclosure: I do not own DeVry (DV).

From my last analysis on student lending, I had whittled down the group of for-profit educational stocks to two companies which I thought as possible investments given their minimal exposure to current private lending troubles. The two companies were DeVry (DV) and Strayer (STRA). I’m going to start off with DeVry today. Consider this part 3 of a made for Internet series on educational services. 

What does DeVry do? 

DeVry operates in the for-profit educational sector offering undergraduate and graduate degree programs across 86 locations in the United States and Canada. Revenues come primarily from 3 main segments: DeVry University, Medical & Healthcare, and Professional/Training. 

DeVry University offers a wide range of programs for anyone wanting to acquire a degree in such areas as computer engineering all the way to hospitality management. Their medical & healthcare education business comes in the form of Ross Medical University which offers medical and veterinary programs, and the Chamberlain College of Nursing which provides various nursing degree programs. Their professional training revenues come from running their Becker CPA and Stalla CFA review prep courses. 

DeVry also runs a number of their programs online and competes directly with the likes of Apollo Group (APOL) which runs the University of Phoenix online program. 

The majority of revenues come primarily from the DeVry University side of the business: 

Although their medical/healthcare and professional/training revenues represent a smaller portion of overall revenues, these two segments are the fastest growing parts of their business with annualized growth rates over 22% over the past 2 years. 

DeVry’s Strategic Moves 

The company is in a midst of optimizing and turning around their business. Investors have reacted positively by bidding up the company’s share price by 84% over the past year. In 2007, they opened up a new 108,000 sqft facility to in Naperville, Illinois, and acquired Advanced Academics to focus on the online education segment. They are trying to match capacity to the current industry growth trends for online education which is growing at 20% annually according to the company. 

The company is also assessing opportunities to expand their educational programs into emerging markets such as Latin America, China, and India. The company is currently operating with no long term debt which should provide them added flexibility for future investments. 

They have optimized current operations by selling off real-estate assets, and last year trimmed their work force through a worker reduction program to keep their costs in check. 

On their 2nd quarter earnings release it was mentioned that they would be increasing expenditures by about 5 to 7 million dollars per quarter to focus on expansion growth in their online business, Chamberlain nursing programs, and building out more capacity for Ross Medical School. Although expenses will have some impact to their bottom line in the next few quarters, the company is putting their investments in the right areas for future growth. 

DeVry’s investment into these segments shouldn’t come as a surprise when you take a look at the operating income margins, with medical/healthcare and professional/training demonstrating double digit margins for 2007. Capital expenditures into programs like Becker CPA review and online programs are relatively light providing this line of business the ability to scale revenue growth but keep costs moderate. 

Job Trends and DeVry’s medical and professional training segments 

DeVry’s two strongest business segments (medical/healthcare and professional/training) are demonstrating success by the very fact of increasing demand for qualified professionals in the nursing accounting, and financial advisor professions. 

According to the US Department of Labor, the employment of registered nurses through 2016 is expected to create 587,000 new jobs representing growth of 23%. Some employers in certain parts of the country are experiencing difficulty attracting registered nurses, while enrollments in registered nursing programs are increasing rapidly over the past few years. Applicants are reported to be turned away due to the shortage of nursing faculty [1]. DeVry’s move to open up another Chamberlain college of nursing facility in Ohio is a step in the right direction. The company also filed applications to open up Chamberlain facilities in Illinois and Arizona to add to their existing location in Missouri and Ohio. The company stated during the 2nd quarter earnings call that their goal was to open up one new Chamberlain facility per year. The aging baby boomer generation will only add to the demand for nurses going forward. 

Within the accounting and financial industries, the US Department of Labor reports 226,000 new jobs in accounting, and 147,000 new jobs for financial analyst/advisors through 2016. This represents job growth rates of approximately 18% and 37% respectively. Demand for CPA and CFA designations will likely increase as these specializations help respective accountants and financial advisors advance their careers and compensation [2]. DeVry’s Becker CPA and Stalla CFA review programs have benefited from these trends showing over 20% top line revenue growth rates for the professional/training segments. The company has made efforts to align these programs with specific accounting firms and societies inside the US and internationally, in the hopes to increase the channel/demand for these review programs. 

The storm in student lending 

The sub-prime credit crisis has spilled over into the student lending industry putting student financial aid at risk. Student lending comes in various forms, with students seeking financing from generally 2 main sources: 

• FFEL (Federal Family Education Program) / Title IV loans. These loans are backed by the government, but issued through financial institutions.
• Direct private lending from the financial institutions.

The main areas of concern for many for-profit schools surround the FFEL program and direct private lending. Many financial institutions have exited the FFEL program due to the sudden freeze in bids for student debt in the auction rate securities market. This in essence reduces the supply of financial aid at some schools. Some banks such as Bank of America have stopped private lending all together and are putting more efforts to switch to the FFEL program. Not all financial institutions can make this switch as 50 lenders have left the FFEL program [3]. So where does this leave DeVry? Apparently only 5% of their tuition revenue comes from private lending [4], so exposure to this channel of financing is light and should not materially impact the company. Looking at the FFEL program, the company should be in good hands as institutions will want to issue FFEL loans to schools with high graduation rates based on quality educational programs, of which DeVry has demonstrated. Just a few days ago the company reiterated their stance that the student lending problems should not affect their student’s ability to secure educational loans and has not affected their business to date [5]. 

A recent bill is being considered by the government to allow the federal government to step into place and buy up student debt and inject liquidity into the FFEL program. The government would pretty much step in place for what were once investors, who have now backed off making bids on securities backed by the FFEL loans [6]. 

As of 2007, DeVry reported more than 80% of their students use government sponsored financial aid. The company will be able to mitigate some of this risk with their very own financing program, EDUCARD. EDUCARD only steps in after all other financing options have been exhausted, requiring students to pay within 12 to 24 months. Accounts Receivables totaled $52.9 million from EDUCARD. Investors should focus on this balance going forward to see if DeVry students increase their reliance on this program, as the company will need to put more due diligence on collections. 

DeVry reports 3rd quarter earnings tonight and you can be sure many questions will be asked surrounding these developments. Particularly surrounding DeVry’s lender relationships, and the speed at which these lenders can work with the government to spin up the new program. There is already some debate surrounding this new government proposal since it really isn’t doing anything to increase yields for these lenders, thus making no sense for lenders to participate if they aren’t making any money, or losing money on every loan they issue [6]. 

What is DeVry’s business worth? 

Given the company’s successful growth in the medical/healthcare and professional/training segments, and the furor surrounding the student lending industry, this provides a baseline on which a low/high end valuation can be formed. 

In order to conduct the cash flow analysis for the next 10 years, I set the discount rate at %11.75 to determine the value of all future cash flows for DeVry. I feel that this rate is justified given some of the risks surrounding the lending industry in the near term, even in light of DeVry’s assertions that they will not be materially affected. 

For the best case scenario, I set revenue growth rates at 20% for the next 5 years, trailing off to 5% for each year thereafter. This assumes DeVry optimizes it operations through continued real-estate sales and targeted capital expenditures and investments to realize continued growth in their medical/healthcare and professional/training segments. This results in a high end valuation of $61/share. 

For the low end valuation, I set revenue growth to 10% for the next 5 years, trailing off to 5% for each year thereafter. This is a slightly more conservative assumption, but still represents healthy growth over the next 5 years given the job trends in the medical and financial service industries. This results in a valuation of $44/share. 

Free cash flow for the next 10 years assuming the conservative side trends nicely upwards: 

I will be waiting for tonight’s earnings call to see where DeVry stands with respect to handling student loans in this market and get some gauge towards their medical/healthcare and professional/training segment growth. Consideration will be given on entering a position near the midpoint of this valuation range if it trades below $50/share. 

DeVry looks to be one of the few for-profit educational stocks that will be able to weather the student lending problems, and its strategic moves over the past year have helped grow their business. Government action to inject liquidity is definitely promising, but still has some risks as the program is not off the ground yet. Long term prospects look promising going forward… just waiting for a good entry point. 

References 

1. US Department of Labor, Bureau of Labor Statistics (Registered Nurses)
2. US Department of Labor, Bureau of Labor Statistics (Accounting/Auditors and Financial Analysts/Advisors).
3. Bank of America to Direct Student Loans to Federal Program, Wall Street Journal, Apr.18th.2008.
4. DeVry earnings call transcript 2Q08, SeekingAlpha.com. Jan.24th.2008
5. DeVry provides update on Student Lender Relationships, April.21st.2008.
6. White House Backs Student-Loan Plan, Wall Street Journal. April.24th.2008.