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Stock: DeVry, Inc. (NYSE:DV) Current Price: $23.

05 Target Price: $30 Recommendation: Buy Team #: 4


Connor Haley Jared Sleeper Linxi Wu
September 25, 2012

For Profit Education


History of explosive growth Huge underserved demand for working adult secondary education Scalable business model with high operating leverage
Tertiary Enrollment Market Share
600 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2000 2010 3.30% 9.10% 500 412.62 400 300 200 104.94 100 21.74 0 2005 2006 2007 2008 2009 2010 2011 57.48 237.35 494.43

DeVry EBIT ($mm)

172.28

A Bubble?
Over-reach:
Many for-profits began spending more on marketing than on educational services Crafted programs and prices to maximize federal tax dollars Very high default rates on federally subsidized student loans
Costs as a % of Revenue (2010) Revenue Sources (2010)

Marketing

23%
Profit

12.8%

Federal Aid State Aid Other

58%

19.7%
Other (SG&A, Education Expenses)

86%

Regulators, especially Sen. Tom Harkin, have viciously attacked the industry for these practices

It Burst!
PPS of Selected Education Stocks
80 70 60 50 40 30 20 10 0 COCO DV BPI APOL

Eisman short thesis unveiled at conference: Subprime goes to College Gainful Employment regulations finalized

Ashford University (BPI) loses accreditation, highlighting a significant new risk for the industry

Creating Opportunity for Long-Term Investors


Extreme volatility has left attractive companies for investors focused on intrinsic value Indiscriminate selling has brought down even the strongest operators in the sector These Best in Class companies have the potential to be compelling bargains Characteristics to look for include: Degree mix consistent with current job market demands Good standing with current and pending regulation Strong balance sheet to survive and capitalize on industry struggles

Overview of DeVry, Inc.


Parent organization of 10 separate institutions Over 120,000 total students enrolled 45% in business, technology, and management 27% in healthcare 28% in international, K-12, and professional education

DeVrySafely Within New Regulations


13% below the 90/10 rule requirement for share of Title IV Funds Higher degree completion rates than peers Strong underlying components in international, healthcare and MBA spaces
Federal Money Share, 2010
Title IV Defense and Veteran Programs 16.90% 1.20% Non-Federal Funds 6.30% 8.70%

The leadership of DeVry has demonstrated a commitment to investing in students and student services, and in engaging in a dialogue to improve, steps which distinguish the company from others in the sector." - Harkin Report

19.10%

11.30% 3.40%

3.40%

77.50%

81.90%

85.10%

85.30%

DeVry

Corinthian Colleges

Bridgepoint

Apollo Group

Cheaper than Ever


EV/FCF
60.00x

50.00x

40.00x

30.00x

20.00x

10.00x

0.00x 2000

2002

2004

2006

2008

2010

2012

2014

Market Expectations
Recent industry regulation and uncertainty make precise long-term estimates difficult For this reason, we first decided to gauge the markets implied expectations for DV given current price (Mauboussin technique) Very important that the model include the inherent operating leverage in the business and account for history of large acquisition We amortized acquisitions over a ten year period and deducted from cash flow each year to reach FCF/student- acquisition adjusted We modeled the operating leverage using a logarithmic function

Quantifying Devry's Operating Leverage (Last Decade)


2000 1800 1600 FCF per Student 1400 1200 1000 800 600 400 200 0 0 20000 40000 60000 80000 100000 120000 DeVry Enrollment (Fall Term, # of Students) 140000

y = 1397.8ln(x) - 14600 R = 0.782

Enrollment Projections DeVry Total Fall Enrollment


140,000 120,000 100,000 80,000 Implied Market Expectations 60,000 40,000 20,000 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Base Case

DCF Valuation
Market Expectations Student Growth years: (1-5) Student Growth years: (6-10) Discount Rate TV Growth Rate Value/Share Premium -5% 0% 10.16% 0% $23.02 0% Base Case 0% 0% 10.16% 3% $31.18 35.26%

Another view: Sum of Parts Valuation


Segment 2012 EBIT (Excluding Impairments) 205.1 86.6 28 N/A EBIT Multiple Valuation per (Based on Share Comps) 3 9.11 9.11 N/A $9.60 $12.30 $3.97 $3.83

Business Tech & Management Healthcare International and K-12 Net Cash

Total:

$29.7 (+28.8%)

*This grossly undervalues the BT&M segment, which includes the valuable Keller School of Business and Management, and includes major drags on EBIT in the Healthcare and K-12 Businesses.

Risks
Federal Regulation Danger of failing to comply with requirements for Federal Funds Accreditation BPI recently lost accreditation at Ashford University, putting into doubt whether they will receive Title IV funds (85.1% of revenue) Industry Stigma Negative public perceptions might continue to weaken enrollment

Thesis Summary and Recommendation


DV is a good company in a distressed sector Strong stand-alone components masked by industry malaise Current market price implies DeVry will never grow again We recommend buying DV shares with a target price of $30, based on our valuations methodologies A rare opportunity to buy a high RoE business with substantial growth opportunities at a double-digit FCF yield
Agreeing with the broad consensus, while a very comfortable place for most people to be, is not generally where above average profits are found. Joel Greenblatt

Questions?