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DeVry (NYSE:DV) is one of the largest for-profit education companies. DeVry University offers undergraduate and graduate programs in business and technology fields (77% of revenue). Under its health-care segment, Ross University offers medical and veterinarian programs, and Chamberlain College offers nursing degrees. Recently acquired schools add allied health programs. Its professional segment offers review courses through its Becker CPA review and Stalla CFA review programs.

-Company profile by Morningstar

DeVry [NYSE:DV] July 27, 2009: $46.80
52-week range: $38.19 (May 4, 2009) - $64.69 (Jan. 22, 2009)
Dividend = $0.18 semi-annually = 0.34% current yield


In an uncertain economy it’s nice to own shares in a company that actually has a macro-economic tailwind. Today’s high unemployment rate has many job-seekers looking to improve their marketability by learning new, sought after vocational skills. DeVry’s career-focused post-secondary programs meet the needs of the current environment.

Results have been stellar. Here are its per share numbers as reported by Value Line. FYs end June 30 of the same year. FY 2009 includes Q4 estimates.

F/Y ...........Sales ........C/F ..........EPS ..........Div ........... B/V ....... Avg. P/E
2005 ........11.09 .......1.20 ........ 0.38 ........ Nil .......... 7.21 ......... 50.9x
2006 ........11.92 .......1.29 .........0.61 ........ Nil ........... 7.98 ......... 35.6x
2007 ........13.12 .......1.56 .........0.94 ........0.10 ......... 9.03 ......... 28.5x
2008 ........15.30 .......2.32 .........1.73 ....... 0.12 .........10.59 ........ 27.2x
2009 ........20.00 .......3.10 .........2.35 ....... 0.16 .........11.90 ........ 21.7x

At this morning’s $46.80 quote, these shares now trade at < 20x trailing year estimates and about 16.2x the consensus $2.90 view for the FY ending next June. Those are well below historical levels as seen in the chart above.

As of March 31st DeVry held $296.7 MM in cash against total debt of just $135.1 MM. Value Line rates their financial strength as ‘B++’. Morningstar assigns DeVry 4-Stars (out of 5) and sees ‘fair value’ as $59 /share.

The company is showing fast growing sales and earnings while maintaining a low debt balance sheet. Dividends were initiated in 2007 and have been raised twice since.

A target price of even 18 times year ahead estimates of $2.90 would lead to a $52.20 share price - up 11.5%. That’s likely to be too conservative as DeVry shares have actually traded as high as $60 - $64.70 in each calendar year 2007-2008 and 2009 year to date.

Here’s a nice buy/write combination out to February 2010:

............................................Cash Outlay ......... Cash Inflow
Buy 1000 DV @$46.80............ $46,800
Sell 10 Feb. $45 calls @$7.10 .............................$7,100
Sell 10 Feb. $45 puts @$5.10 ............................. $5,100
Net Cash Out-of-Pocket .......... $34,600

If DeVry shares remain above $45 on Feb. 19, 2010:

  • The $45 calls will be exercised.
  • You will sell your shares for $45,000.
  • The $45 puts will expire worthless.
  • You will have received $80 in dividends.
  • You will have no further option obligations.
  • You will hold no shares and $45,080 in cash.

That’s a best-case scenario net total return of

$10,480 / $34,600 = 30.2%

achieved in about 6.7 months on shares that:

  • Went up.
  • Stayed unchanged.
  • Declined by up to $1.80/share or (-3.8%)

What’s the risk?

If DeVry shares finish below $45 on Feb. 19, 2010:

  • The $45 calls will expire worthless.
  • The $45 puts will be exercised.
  • You will be forced to buy another 1000 DV shares.
  • You will need to lay out an additional $45,000 cash.
  • You will have received $80 in dividends.
  • You will have no further option obligations.
  • You will end up with 2000 DeVry shares.

What’s the break-even on the whole trade?

On the first 1000 shares it’s the $46.80 purchase price less the $7.10 /share call premium = $39.10 /share.

On the ‘put’ shares it’s the $45 strike price less the $5.10 /share put premium = $39.90 /share.

Your overall break-even would be the average of those or $39.50 /share.

While past performance is no guarantee of future performance, I can tell you that the 2008 – 2009 absolute lows were $39.30 and $38.20 respectively during one of the worst stock market panics in history.

Disclosure: Author is long DV shares and short DV options.

Source: DeVry: 'Learning' to Make Money