Description

DeVry (DV) offers investors the opportunity to own attractive and growing education businesses serving high demand professions at a reasonable valuation while holding an option on improvement of the DeVry University business.  An in line with peer average 8x EV/2015E EBITDA multiple (in line with LOPE, CPLA and STRA) on DV’s growth businesses, implies that the market is assigning just a 4x EV/EBITDA multiple on very depressed earnings for the DeVry University business ($4 per share of value), a business that accounts for nearly half of total company revenue and once generated operating margins over 20%.  With little value assigned to the DeVry University business, growing franchises and over $7 per share in cash, downside in DV shares is limited with significant upside potential.      

DV’s growing businesses (Ross University, American University, Chamberlain College of Nursing, Carrington College, DeVry Brazil and Becker) accounted for ~90% of FY14 operating profit, up from ~28% in 2011 (see below for business descriptions and competitive advantages).  Revenue for these businesses has been growing in the double digits and these businesses should continue growing at similar rates supported by strong demand trends in the relevant professions and pricing power.  These businesses have solid reputations, long operating histories, and generally deliver positive outcomes for students.  

The company’s DeVry University segment has encountered challenges in recent years as students have been reluctant to take on debt, students have questioned the value proposition offered by college and competition has increased.  Contrary to the impression of some investors, DeVry University (founded in 1931) typically generates respectable outcomes for its graduates with 90.9% of its 2013 graduates finding employment within six months of graduation at an average starting salary of $44,295.  While results in the DeVry University will not meaningfully improve in the near term due to weak recent enrollment trends, the company is aggressively taking actions to improve the performance of this business.  There is also a new management team at DeVry University (led by Robert Paul who started in July 2014), which previously led the turnaround at Carrington University.  They have established three program verticals (business & management, engineering & information sciences and emerging programs) and are focused on better communication of the value proposition of each program.  Near-term, the management team is focused on optimizing the number of programs, improving the effectiveness of the recruiting processes (should improve student persistence), reducing the cost structure of the university (closed 5 locations in FY14 and initiated projects at 24 campuses to reduce costs) and refining the pricing strategy including adjusting the scholarship program to be more effective.  DV also recently raised its cost savings target for FY15 from $70 million to at least $90 million primarily from within the DeVry University business.  DV should realize additional cost savings in FY16.  As students gain confidence in the economy, the DeVry University business should recover.    

The DeVry University business is currently operating at close to breakeven with FY14 operating margins of just 3.3%.  This business generated operating margins of up to the mid 20’s% in the past.  While I do not expect a return to this margin level, operating margins in the high single to low double digits should be achievable as the new management team’s plan is implemented.  Assuming an 8% normalized operating margin for DeVry University and 6.5x EV/EBITDA multiple (in line with APOL), the DeVry University business is worth $10 per share.  A ~8x multiple on my FY16 EBITDA estimate for the non-DeVry University businesses suggests a price target of $36 per share for these businesses.  Reducing the value by $1 per share for unallocated corporate expenses and adding back over $7 per share in net cash leads to a price target of ~$54.  A reasonable 9x EV/EBITDA multiple on DV’s attractive growth businesses suggests a price target of ~$58.  Even if I assume no improvement in the DeVry University business, the company should be able to generate a total company EPS CAGR in the teens over the next few years driven by revenue growth in the non-DeVry University businesses and operating margin improvement. 

DV has an exceptionally strong balance sheet with cash & marketable securities of $488 million (~18% of the market cap) and no debt.  In addition, the company should generate nearly $200 million in annual free cash flow.  The company did not actively repurchase shares in FY14 but as the DeVry University business recovers, it could repurchase a meaningful number of shares given the cash position and free cash flow generation.  A large repurchase program could be a catalyst for DV shares.         

BUSINESSES

DeVry University & Keller Graduate School

DeVry University was founded by Dr. Herman DeVry in 1931 and provides career-oriented masters, bachelors and associate degree programs in technology, science, business, and the arts through ~89 locations and online.  It accounted for 48% of FY14 revenue but just ~10% of operating profit.  DeVry University certainly does not have the prestige of an Ivy League university but it generally delivers a respectable value proposition with a strong track record of placement and starting salaries.  While DeVry University is not the cheapest option in the market, it offers a high level of service to students.  In 2013, 90.9% of graduates of DeVry University’s associate and bachelor’s degree programs who were actively seeking employment had careers in their chosen fields within six months of graduation at an average salary of $44,295, a respectable outcome for its students.  The company is also building employer relationships and DeVry University currently has 400 relationships that cover 4,000 students.  Growing employer relationships will create a more consistent revenue stream over time.    

Ross University & American University of the Caribbean

Ross (founded in 1978) & American (founded 1982) universities accounted for ~17% of FY14 revenue.  There are ~5,900 students employed at DV’s two Caribbean based schools.  These are unique assets as no other for profit U.S. school owns a medical (American University) or veterinary school (Ross University).  There is strong and persistent demand for medical degrees with only 45% of 48K 2013/2014 U.S. medical school applicants enrolled and only 45% of 7K 2013/2014 U.S. veterinary medical school applicants enrolled.  Ross and American are two of just four Caribbean schools that have been approved to participate in the U.S. Title IV student aid programs.  The strong demand for medical schools has led to robust pricing power with 3% to 5% tuition increases recently.

Chamberlain College of Nursing

Chamberlain (founded 1889) offers nursing degrees through 15 campuses and online.  Chamberlain offers pre-licensure associate and bachelor’s degree programs in nursing at thirteen campus locations and post-licensure bachelor’s, master’s and doctorate degree programs in nursing online.  Management is planning to double the campus footprint over the next five years with three new campuses expected to open in FY15.  Chamberlain also has ~350 employer relationships that should support enrollment growth.  Enrollment at the college is ~17,600 (up 39% YoY) and Chamberlain accounted for ~15% of FY14 revenue. 

Robust demand for nurses in the U.S. as the population ages should drive continued demand for nursing degrees.  The Bureau of Labor Statistics reports that employment of RNs is expected to grow 19% from 2012 to 2022, faster than the average employment growth rate for all occupations.  U.S. nursing schools turned away 57,944 qualified applicants from baccalaureate nursing programs in 2013 due to an insufficient number of faculty, clinical sites, classroom space, clinical preceptors, and budget constraints.    

Carrington College

Carrington College offers healthcare related certificate, associate’s and bachelor’s degree programs at 17 campuses in the Western U.S. and online.  The college enrolls an estimated 7,400 students.  Carrington accounted for ~8% of FY14 revenue and the results of this business have recently started to improve. 

DeVry Brazil

DV has a rapidly growing Brazil business with eight institutions that accounted for ~7% of total company FY14 revenue.  DeVry Brazil serves more than 36,000 students with about 1/3^rd of enrollments in technology and engineering, another 25% of enrollments are in healthcare and the balance in business and law.  The return on educational investment for a college degree in Brazil is one of the highest in the world and this should support continued demand growth.  Individuals with a college degree earn 171% more than individuals without a degree.  Enrollment at post-secondary institutions in Brazil totaled seven million students as of 2012.  That represents approximately 15% of the addressable population of 18 year olds to 24 year olds.   The comparable rate in United States is 41%.

Becker

Becker Professional Education prepares candidates for professional exams including the CPA and PMP certification examinations though online classes, self-study and in person classes.  In FY14, Becker enrolled 45,000 students in 300 locations.  Becker accounted for ~5% of FY14 revenue.  Demand for CPA’s remains strong with 45% of employers planning to hire master of accounting graduates, up from 36% last year.  Becker is recognized as the premier with CPA study provider and it has partnerships with the large accounting firms.   

RISKS

The DeVry University business could generate losses.

While the company is taking actions to improve this business and is committed to operating it at least at breakeven in the near-term, enrollment trends could deteriorate more than expected and the business could generate losses.  Additionally, President Obama recently announced a plan to offer free community college to students.  The probability of this bill passing a Republican controlled congress is very low and this is supported by recent comments from Republican congressmen.        

Regulatory changes are a concern as the company relies on government backed loans to fund much of its students’ tuition payments.

Federal Loans and Grants accounted for 66% of funding for the company’s students and government actions to reduce funding could negatively impact DV. 

Growth trends in the non-DeVry University segments could slow. 

Competition could increase in the non-DeVry University segment.  

Catalyst

Improvement in the DeVry University business. 

Large share repurchase program.