Did You Take Profits in DeVry?

Jan.29.09 | About: DeVry Education (DV)

There has been a lot of talk about for-profit educators such as DeVry (NYSE:DV) as unemployment continues to worsen. The thinking goes that people who are out of work tend to go back to school in order to improve their skills in the eyes of potential employers. We wrote an article on this phenomenon in November (DeVry Thrives as Unemployment Spreads) when unemployment hit a 16-year high and the numbers have only gotten worse since.

Since that post, the stock ran up 22% before DeVry reported its fiscal second quarter earnings, which were in-line with estimates. These results were actually quite good, especially the 35% increase in revenue. However, the fact that DeVry’s operating performance continues to excel in a miserable economic environment yet DV’s stock market reaction has been muted at best reeks of overvaluation.

DV recently reached an all-time high price, which is astounding compared to the rest of the market. The S&P 500 is down more than 38% over the past twelve months but as of today’s open, DV was up about 10%. We maintain our view that this stock is particularly resistant to the macroeconomic downturn but at the current price is just too expensive to recommend now.

We rate it as Overvalued from a valuation standpoint, which uses historical evidence to quantify a company’s relative appeal in the market. For example, over the last ten years the stock has historically had a price-to-cash ratio between 6.65x and 12.14x; the current metric is way above its normal range at 25.5x. Similarly, price-to-sales has historically ranged between .90x and 1.64x but, even after a 35% spike in revenue, this metric is currently in the low three’s. As you can see, DV’s valuation is not very compelling at current levels even though we think the company’s earnings were very impressive. This stock is just too far out-of-line with the market’s valuation at this point and such a rich valuation compared to DV’s historical range makes it too risky in such a treacherous market.

Based on historical valuation metrics, Ockham believes that DV is simply too hot for us to recommend purchasing right now. Even insiders are using this opportunity to divest substantial amounts of stock. There is no doubt that DeVry’s potential for revenue growth continues to be impressive and seemingly gets a boost with each layoff announcement.

While the company has excellent growth potential, we generally avoid recommending stocks that are trading so close to all time highs. Although today the stock is down a good bit (about seven percent right now) after posting outstanding quarterly results and the broader market indices are all up nicely, we recommend taking profits in DV and putting them to work in another recession-resistant stock that hasn’t run-up so much over the last few months.