A word of caution to current owners of DeVry Education Group (DV): Just because the company says it’s in the midst of a turnaround effort doesn’t necessarily mean things are turning around.
To the for-profit school’s credit, it’s arguably making the most responsible changes it can in light of a rather foreboding situation. But there’s only so much that DeVry can do to fight the tide, however.
And despite today’s bounceback in DV stock to a gain of 5% after a rough start to the session, the size of the hurdle that still looms ahead after hearing last quarter’s results and the near-term outlook is daunting.
It’s too bad too, since among all the for-profit schools, DeVry seemed to be the one with the best shot at serving the industry’s meltdown.
DeVry Earnings, Outlook
In its fiscal fourth quarter, which ended in June, DeVry earned an operating profit of 57 cents per share on $473.2 million worth of revenue. Both missed estimates. The pros were calling for a bottom line of 63 cents per share of DV stock and top line of $481.7 million.
The Q4 numbers were even more alarming on a year-over-year basis. Profits fell 22%, from 73 cents per share a year earlier. Revenue slumped too, to the tune of 2.5% from the year-ago top line of $485.1 million.
It could have been worse. In fact, there were a few bright spots from last quarter for DeVry. Total enrollment reportedly grew 20%, and the school is closing some locations as part of a restructuring plan that will ultimately save $125 million for the current fiscal year.
But a closer look at the quarter’s details reveals the bulk of any progress stemmed from acquisitions rather than organic growth. Enrollments for the current semester at namesake DeVry University fell more than 18% last quarter on a year-over-year basis, as did DeVry University’s revenue.
And things are projected to be much better anytime soon either. The company has projected a 5% decline in revenue for the current quarter, and for the year. Operating costs, however, are only expected to fall between 2% and 3%, pointing to even-thinner profit margins for an outfit that’s already only turning 7.7% of its revenue into a net profit.
The Rest of the Story
Interestingly, it didn’t explicitly come up once during the conference call. On the other hand, it doesn’t need to be said — the for-profit school industry is fighting an uphill battle, with some arms of the federal government looking for ways to effectively kill the industry’s lifeblood: government-backed student loans.
The most recent of these measures that could adversely impact the value of DV stock is the so-called “gainful employment” rule. In simplest terms, this rule dictates that if the average debt-to-income ratio for its graduates, then that school risks losing access to federally-supported financial aid.
Even without the implementation of the new rule, however, the damage may have already been done. And not just to DeVry. Apollo Education Group (APOL), Career Education (CECO) and most other for-profit schools have already seen enrollments suffer in the wake of a sea of bad publicity that questioned the marketability value of their degree and certification programs.
But DeVry is a work in progress?
That’s what CEO Daniel Hamburger effectively said during the earnings call, noting, “We see tremendous value to be unlocked at DeVry University, once we complete its transformation.”
To put it bluntly, though, those are words that should terrify current and would-be owners of DV stock.
It’s admittedly an apples-to-oranges comparison in terms of the industry, but not in terms of philosophy. Eddie Lampert has been leading a “transformation” of Sears Holding (SHLD) for years. Problem is, that transformation was from a once-decent retailer into a train-wreck of a company.
The term “unlocking value” is another red flag. If the value is there, why has it been locked up this long?
The point is, when investors start hearing somewhat ambiguous buzz words about a turnaround effort, it may be a tacit sign that management wants to serve up some hope, but doesn’t actually know how to stop the bleeding.
Bottom Line for DV Stock
Of all the for-profit schools, DeVry’s technology and healthcare programs are the most credible, and seem to lead many of its students to better jobs. But, being the best still isn’t good enough to make a company investment-worthy. Today’s post-earnings bounce isn’t apt to be any more than a blip within a prolonged pullback. Bigger problems still abound.
Let’s put it like this — if the bigger tide ever turns favorable for the for-profit schools again, DV stock may be the best bet. In the meantime though, DeVry continues to hit a headwind, and it can’t buy its growth forever.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
