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DeVry Jumps to Neutral on Solid 1Q

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We recently upgraded our recommendation on DeVry, Inc. (DV - Analyst Report) from Underperform to Neutral due to its better-than-expected first quarter 2013 results.

DeVry’s first quarter fiscal 2013 earnings of 49 cents per share beat the Zacks Consensus Estimate of 31 cents by 58%. Higher-than-expected cost savings and improved new enrollment growth in some institutions drove the earnings beat. Continued progress on its performance improvement plan to align costs, regain enrollment growth and make growth investments helped the company to turnaround from the past few weak quarterly results. Revenues also beat the Zacks Consensus Estimate of $481 million mainly driven by better-than-expected new enrollment growth at the medical institutions.

Though postsecondary enrollments across all its programs declined year over year, the company witnessed solid new enrollment growth in healthcare institutions like Chamberlain College of Nursing and Carrington Colleges. The sequential improvement in new enrollments at DeVry University is also an encouraging sign. Operating costs declined both year over year and sequentially owing to DeVry’s cost saving initiatives.

Though near-term results are expected to remain choppy due to continued enrollment declines at the flagship DeVry University, we believe that the company has a solid plan to reduce costs and drive attractive earnings growth in the 2014-2016 period.

In order to combat declining profits and student enrolments, DeVry has undertaken cost-saving initiatives like workforce reduction and has curbed discretionary spending. Additionally, 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; and improving its technology. 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.

The company’s largest competitive advantage is its diversified offering of academic programs. Some years back, the company was heavily concentrated on technology programs through DeVry University. With the downturn in the technology sector, the company focused on creating a diversified group of institutions. 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.

DeVry aims to expand through acquisitions as part of its long-term growth strategies. The acquisitions enable DeVry to grow and diversify into new program areas, levels and geographies and build high-quality brands to compete in an increasingly competitive market.

DeVry, which competes with Apollo Group (APOL - Analyst Report), carries a Zacks # 2 Rank (a short-term ‘Buy’ rating) on the back of positive momentum in the stock following unexpected and solid first quarter results last month.

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