DeVry Appears Undervalued

May.31.12 | About: DeVry Education (DV)

DeVry Inc. (NYSE:DV) is a for-profit education company offering various degree programs in fields including business, technology, healthcare and professional designations (i.e. CPA and CFA). The firm's shares declined ~26% year to date primarily owing to lower student enrollment as a result of industry headwinds such as regulatory uncertainty, mounting student debt, and lower student placement rate. Despite the headwinds weighing on industry revenue growth, I think the current stock price at ~$28 is excessively discounted by the market given the firm's solid exposure to healthcare education, earnings power, and robust free cash flow margin.

In this article, I will run you through my valuation method based on publicly comparable company analysis, which is then supported by my DCF model, to determine the stock's fair value.

Relative Valuation

I have picked 12 major U.S.-listed companies in the for-profit education industry. Their respective valuation multiples and financial metrics are summarized below:

(click to enlarge)Click to enlarge

From the above table, we have the following observations:

  • Both DV's historical and forecast revenue growth trends are in line with its industry peer averages;
  • Both DV's historical and forecast EPS growth are lower than industry peer averages, especially for 2-year EPS forecast CAGR;
  • Historical EBIT, net, and FCF margins are in line with the peers'; and
  • Historical average ROE is below par.

Overall, DV slightly under performs compared with the group, hence a valuation discount of approximately 10%-15% should be warranted.

The fair stock value is calculated by weighting two different trailing-price-multiple methodologies. To reflect DV's financial performance and its desired revenue exposure to healthcare education, I assigned a very conservative 10% discount on two price multiples. By multiplying the most recent financial metrics by their respective adjusted multiples, I arrived at two different valuations, which are equally weighted. Finally, the model yields a stock value of ~$32, representing a ~16% upside from the current price level.

Absolute Valuation

Then the fair value is checked against my DCF model with the following very conservative assumptions:

(click to enlarge)Click to enlarge

The model yields a stock value of ~$37, a ~35% upside from the current market price.

Additional Facts to Consider

  • ~27% of DV's revenue is generated from healthcare education, which is less impacted by industry headwinds;
  • DV is sitting on ~$332M cash, amounting to ~$5 per share or ~18% of the current stock price, and with no debt;
  • The firm has an ongoing stock buyback program and has bought back ~$301M shares since 2007;
  • The firm also pays a dividend, which is currently yielding ~1.05%; and
  • According to Thomson One, of the 16 analysts covering the stock, six rate it a strong buy, two rate it a buy, and eight rate it a hold, and their average target price is about ~$37.

Charts and tables are created by the author. Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One and Morningstar.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DV over the next 72 hours.