DeVry stock poised for further gains, despite declining enrollment

DeVry Chicago campus

By Karen Lentz

Shares of Downers Grove-based career college chain DeVry Education Group Inc. have soared nearly 40 percent since the presidential election in November, and analysts see more opportunity ahead for investors.

Shares closed Tuesday at $33, after getting a bump last week from the March 6 U.S. Department of Education announcement that gainful employment regulation compliance and appeal deadlines would be extended until July 1.

The regulation requires career training programs to meet specified debt-to-income ratio requirements and to disclose employment outcomes for its graduates. Three DeVry University programs received failing ratings in the gainful employment report released in January.

The stock has more than doubled since setting its 52-week low of $15.36 in June 2016, shortly after Lisa Wardell, who previously served on DeVry’s board, took over as CEO.

After a slow climb in the latter half of 2016, shares have been on the upswing since the presidential election, on expectations that the new administration will look more favorably on the for-profit higher education industry. Shares reached a 52-week high of $34.48 on Jan. 11.

DeVry Stock Prices
Shares of DeVry Education Group Inc. have continued their upward climb since the November presidential election. (Karen Lentz/MEDILL)

Seven analysts surveyed by Bloomberg LP have a consensus price target of $36.43. Four of the analysts have a “buy” rating on the shares, while three give them a “hold” rating.

“The biggest swing factor between the extremes remains an assessment of the company’s regulatory liability,” analyst Trace Urdan of Credit Suisse Securities LLC wrote in a November research note.

The company has recently been plagued by lawsuits and regulatory proceedings. A settlement with the U.S. Department of Education in October required the company to post a five-year letter of credit for $68.4 million to cover refunds and transitional costs for students. The proceeding concerned advertising claims about the number of alumni who found jobs in their respective fields following completion of DeVry University programs.

In December, the company settled a Federal Trade Commission lawsuit for $100 million, also related to DeVry University advertising. As part of that settlement, DeVry agreed to pay $49.4 million to students and $50.6 million to forgive student debt. The company also agreed to a $2.75 million settlement announced on Jan. 31, to resolve an investigation into its advertising by the New York Attorney General.

The company denied wrongdoing in each case.

In the quarter ended Dec. 31, the company paid a total of $56.3 million in regulatory settlements, according to documents filed with the U.S. Securities and Exchange Commission.

“At no time has the academic quality of a DeVry education been questioned,” Wardell said on a Feb. 2 conference call with investors.

The company reported diluted earnings per share of 23 cents in the quarter, missing estimates by 50 cents, and said regulatory settlements affected its earnings per share in the quarter by 88 cents. Still, excluding the settlement amounts and some restructuring expenses, the company reported earnings per share of 85 cents, beating the analysts’ estimate of 73 cents.

Net income for the full fiscal year ending June 30 is expected to swing to a profit of $121 million, according to analysts surveyed by Bloomberg, from the prior-year loss of $3.2 million.

DeVry Quarterly Net Income
DeVry Education Group has seen losses and gains in net income over the previous five quarters. Data source: Company filings. (Karen Lentz/MEDILL)

In its Feb. 2 earnings announcement, the company revised its previous estimate of flat revenues for the year to a drop of up to 1 percent.

The company also faces a major challenge in declining enrollments. Though DeVry reported a 7.6 percent increase in total enrollment to 149,528 students, gains were concentrated in the company’s Chamberlain College of Nursing, where enrollment for the January session was up 6.6 percent over the prior year.

“There is acute shortage of trained nurses worldwide. There are even fewer numbers of infrastructure and faculties to train nurses. As a result, demand for these nursing programs is huge,” Zacks Investment Management Inc. wrote in a research note.

Wardell noted on the quarterly earnings call that the company is adjusting Chamberlain admission standards toward more selectivity, and expects to see some short-term effects in enrollment.

“DeVry is strengthening its admissions process which could moderate growth in the near-term to some extent, but at the same time should also lead to better academic performance, higher NCLEX pass rates and higher persistence, which will only improve its performance over the longer term,” Zacks analysts wrote.

All other segments reported enrollment declines in the fiscal quarter.

Business and technical training arm DeVry University saw enrollment in the January session drop 21.6 percent from January 2016, and expects declines to continue for the remainder of the fiscal year, resulting in lower revenue, according to its SEC filing.

DeVry University enrollment declines have reduced revenue by almost 50 percent since fiscal year 2014, the company noted.

Student enrollments have seen similar declines industry-wide, partially due to a low unemployment rate in the U.S., which means students are less likely to seek career training or education.

In its February SEC filings, the company cited increasing competition for adult students, its largest segment, from traditional four-year colleges and public sector colleges, noting that its competitors often offered programs and degrees at lower prices.

Additionally, the company noted that reputational damage may have decreased interest by potential students and said it could not quantify how this might affect future enrollment.

“The regulatory environment in which DeVry University currently operates and the national attention on the for-profit education industry, including the failure of several high-profile competitors, hinders our ability to attract new students which is expected to continue into the foreseeable future,” the company reported in the February filing.

DeVry’s price-to-earnings ratio for the trailing 12 months currently stands at 25.98, compared with an industry average of 86.80 for education and training services, as reported by Yahoo Finance, and 26.55 for the Standard & Poor’s 500 index.

“We believe these assets are undervalued,” Urdan wrote in a research note.

On Feb. 16, the company announced its board’s approval of a repurchase program for up to $300 million of its common stock through Dec. 31, 2020.

“The company’s cost-saving initiatives, transformation strategy and plans to introduce more stackable programs in 2017 should drive growth in the upcoming quarters,” Zacks analysts wrote.

The company has continued to make acquisitions over the last four quarters, including the Association of Certified Anti-Money Laundering Specialists for $330 million, as well as two Brazilian education providers, Grupo Ibmec and Faculdade de Imperatriz, for a combined $187 million. The acquisitions helped fuel 83 percent revenue growth in Brazil during the quarter, according to the company’s release.

Student enrollments in Brazil have been hit by the Brazilian economy and by reductions in student financing funds, though the company is working with private lenders to try to address this.

Strategies to address overall enrollment issues include new certificate programs and other shorter courses of study, new scheduling systems, optimizing pricing by use of scholarships, and increased focus on corporate and employer relationships.

In January, the company launched its DeVry Tech initiative, which incorporates technology skills training into each program, to enhance employment prospects.

Because the company derives a significant portion of its revenue from federal student financial aid programs, it needs to remain eligible to participate by meeting requirements on default rates and debt-to-earnings ratios, according to Zacks analysts.

The company is aiming to reduce the risk by limiting the revenue derived from federal financial aid programs to 85 percent or lower by the end of the fiscal year in June.

The company has also continued to work on cost containment, resulting in a 12 percent decrease in operating expenses in the second quarter over the previous year.

The company will report its third quarter earnings on April 25.

Photo at top: DeVry’s Bricktown-area campus is one of nine locations in the Chicago area. (Karen Lentz/MEDILL)