DeVry Inc. (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:
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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:
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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.
