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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

DeVry—Safely 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 market’s 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 R² = 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?