DeVry : Solid 1QF10 Shows Continued Healthy Balance of Growth and Margin Expansion

North America Equity Research
DeVry: Solid 1QF10 Shows Continued Healthy Balance of Growth and Margin ExpansionNeutral
Yesterday, DeVry reported its 1QF10 (Sept) EPS of $0.76, well above our estimate of $0.64 and consensus of $0.66, as a result of the robust revenue growth and efficiencies in student services and administrative spending.
Positives included strong total enrollment growth momentum across most businesses, favorable student persistence, and strong cash flow, and continued impressive margin efficiencies within the Business, Technology and Management (formerly DVU) segment. Negatives included continued cyclical drag from the Professional & Training segment and a negative margin mix due to the USEC acquisition. In addition, management stated that future growth rates are against tougher y/y “comparisons.”
Education sector is out of favor, but strong fundamentals are hard to ignore. We recognize that education stocks have been vulnerable in the last few months due to 1) regulatory/legislative uncertainty and 2) sector rotation away from defensive stocks. We continue to believe that education stocks provide a good balance of growth-defensiveness in a still uncertain economy and will show healthy (albeit much decelerated) growth during an economic expansion due to secular drivers.
Efficiencies are encouraging, but intermediate term margin upside may be limited in our view. We acknowledge that DeVry’s investments will likely decelerate in the next several quarters resulting in a modest margin expansion. We expect ~130 bps y/y margin expansion (to 18.0%) in FY2010, above DV’s historical peak operating margin (of 17%). We appreciate DV’s approach of balancing growth and margin expansion and believe that company's investments should propel solid growth regardless of the economic cycle.
We maintain Neutral rating. We raise our FY10 and FY11 EPS estimates by $0.18 and $0.20 to $3.14 and $3.63, respectively, to account for the healthy enrollment momentum and efficiencies. Following a 40%+ rally since May, shares of DV trade at 17x our CY10 estimate of $3.38, above the group average multiple of 14x. We believe DV’s premium reflects its diversified nature and growth/margin balance. Our new December 2010 PT of $60 implies 17x our FY2011 EPS estimate, approximately inline with the current forward multiple.