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On Oct 7, we maintained a Neutral recommendation on the for-profit education company, DeVry Inc. (DV - Analyst Report), due to mixed fourth-quarter fiscal 2013 results announced on Aug 8.

Why the Neutral Recommendation?

DeVry’s fourth-quarter fiscal 2013 adjusted earnings of 54 cents per share beat the Zacks Consensus Estimate of 41 cents per share by 31.7%. Lower operating expenses drove the earnings beat for this for-profit education company despite the soft revenues. Earnings also improved 3.8% from the prior-year quarter.

However, net sales fell 4.4% year over year to $480 million. The decline was the result of the relatively strong growth in the healthcare and international businesses being offset by continued revenue decline at the flagship DeVry University which accounts for half of the company’s revenues. Revenues were in line with the Zacks Consensus Estimate of $480 million.

The company’s total post-secondary enrollments across all its programs were down 6.0% from the prior-year quarter. DeVry has been witnessing persistent enrollment declines, mainly at DeVry University, as a result of overall economic downturn and lack of student confidence which has reduced demand.

Moreover, management expects weak enrollment trends and revenue decline at DeVry University to outweigh further cost savings and growth in other institutions in fiscal 2014 as well.

Following the sluggish enrollment trends at DeVry University and the dampened outlook for fiscal 2014, estimates were largely revised downwards. The Zacks Consensus Estimate for fiscal 2014 went down by 6% while that for fiscal 2015 declined 8.4% over the last 60 days.

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, 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 400 corporate/government partnerships; of which many are with Fortune 500 companies like Wal-Mart Stores Inc. (WMT - Analyst Report). 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 ATA, Inc. and Apollo Group, Inc. (APOL - Analyst Report). Both the companies carry a Zacks Rank #1 (Strong Buy).

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