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DeVry Held at Neutral

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On Mar 18, we maintained a Neutral recommendation on leading higher education provider, DeVry Inc. , despite solid second-quarter fiscal 2013 results as we await enrollment growth at its flagship DeVry University. The company carries a Zacks Rank #2 (Buy), reflecting the impressive results in the second quarter.

Why the Neutral Recommendation?

On Feb 6, 2013, DeVry announced its second-quarter fiscal 2013 results. Adjusted earnings of 87 cents per share significantly beat the Zacks Consensus Estimate by 53%. Lower operating expenses and positive new student enrollment growth of 5.6% drove the earnings beat. Earnings, however, declined 5% from the prior-year quarter due to lower year-over-year revenue.

Revenue also beat the Zacks Consensus Estimate, attributable to solid new and total student enrollment growth at its healthcare institutions, which gained from higher demand. However, DeVry’s revenues fell 3.6% year over year to $505 million due to lower year-over-year enrollment growth.

Continued progress on its performance improvement plan to align costs, regain enrollment growth and make growth investments, has helped the company beat expectations in both the quarters of fiscal 2013; a turnaround from weak quarterly results in fiscal 2012.

In order to combat declining profits and student enrolments, DeVry has undertaken cost-saving initiatives like workforce reduction and 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.

Moreover, its diversified portfolio of programs and regular strategic acquisitions give it a competitive advantage.

Following the earnings and revenue beat in the second quarter, estimates largely moved upwards over the past 60 days. The Zacks Consensus Estimate for 2013 went up a robust 22.3% to $2.63 while that for 2014 increased 9.8% to $2.69 over the last 60 days.

DeVry is currently outperforming many other education companies like Apollo Group, Inc and ITT Educational Services Inc. which have been consistently reporting weak enrollment growth. We however prefer to remain on the sidelines until we see improving enrollment trends at its flagship DeVry University.

DeVry has been witnessing a persistent decline in enrollments, mainly at its flagship institution, DeVry University due to the weak macroeconomic environment and subsequent decline in student demand (due to the hesitancy over taking a loan). In fact, enrollments have declined across the entire higher education system in 2012, in the United States.

The competitive landscape is also intense. Moreover, the continued challenging regulatory environment remains a persistent overhang. We, therefore, prefer to remain on the sidelines until we see improving enrollment trends at DeVry University.

Other Stocks to Consider

Another education company worth a look is Grand Canyon Education, Inc. (LOPE - Free Report) , which carries a Zacks Rank #2 (Buy).

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