DeVry (DV)

DeVry’s (DV) performance this past quarter was quite impressive. Compared to the same period one year ago:

• Revenue is up 18.4% to $291 million
• Operating Income up 70.9% to $50.6 million (17.3% operating income margin)
• Net Income up 67.2% to $38.3 million

These results come on top of some very impressive enrollment numbers:

• New undergraduate enrollment increased 12.1% to 12,410 students
• Total student enrollment increased 10.3% to 44,814 students
• Total number of online courses taken increased by 25% to 43,889

The company is following through on their investment plans to lay the foundation for their fastest growing business segments (Medical/Healthcare and Professional/Training):

• For the January 2008 term Ross University (medical/veterinary) is showing a 7% enrollment increase from a year ago.
• The company opened up Chamberlain College of Nursing opened up their two new locations in Illinois and Arizona. They are still planning to open up one Chamberlain facility per year going forward.
• Becker CPA review’s revenues surged 30.4% compared to the same quarter a year ago. A new office in Hong Kong was opened to meet the needs of Asia.

Daniel Hamburger (CEO), on the 3rd quarter conference call reiterated that the company's relationships with lenders still remains strong, and that FFEL and Private Lending would still be available to DeVry students. He did mention that there were some disruptions with Wachovia, but that the issues would be resolved within a few weeks. The other lenders that DeVry is working with are:

• Sallie Mae (DeVry is only 1 of 2 instutions Sallie Mae is continuing private lending programs with)
• Citibank
• Bank of America
• Wells Fargo
• Wachovia
• Chase

The company also spoke about a possible acquisition in the career college market, specifically around the healthcare segment. The company has strong cash flow, but the CFO did mention that they had a $250 million line of credit they could tap if they were to make an acquisition. Given this news, and the important summer months where students seek more student loans heading into the fall semester, I'm still waiting for an entry position under $50/share.

Keep an eye out for the next few months to see how the new government program to buy up student debt will play out.

Given the company’s successful growth in the medical/healthcare and professional/training segments, and the furor surrounding the student lending industry, this provides a baseline on which a low/high end valuation can be formed.

In order to conduct the cash flow analysis for the next 10 years, I set the discount rate at %11.75 to determine the value of all future cash flows for DeVry. I feel that this rate is justified given some of the risks surrounding the lending industry in the near term, even in light of DeVry’s assertions that they will not be materially affected.

For the best case scenario, revenue growth rates is set at 20% for the next 5 years, trailing off to 5% for each year thereafter. This assumes DeVry optimizes it operations through continued real-estate sales and targeted capital expenditures and investments to realize continued growth in their medical/healthcare and professional/training segments. This results in a high end valuation of $61/share.

For the low end valuation, revenue growth is set to 10% for the next 5 years, trailing off to 5% for each year thereafter. This is a slightly more conservative assumption, but still represents healthy growth over the next 5 years given the job trends in the medical and financial service industries. This results in a valuation of $44/share.

DeVry looks to be one of the few for-profit educational stocks that will be able to weather the student lending problems, and its strategic moves over the past year have helped grow their business. Government action to inject liquidity is definitely promising, but still has some risks as the program is not off the ground yet. Long term prospects look promising going forward... just waiting for a good entry point.