DeVry Education Earnings Preview: Still Risky Despite International Expansion

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Richard Saintvilus

http://seekingalpha.com/article/3443656-devry-education-earnings-preview-still-risky-despite-international-expansion

Aug. 17, 2015 2:10 AM ET  |  About: DeVry Education Group Inc. (DV)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Summary

The industry continues to suffer from bad publicity and slumping student enrollment.

And with the company’s fiscal 2016 earnings estimates projected to decline more than 2% from 2015, DV stock carries more risk than before.

DeVry must convince new students they should pay for school at a time when the government can offer them the same — if not better education — at no cost.

I would be a seller of DV stock ahead of Tuesday’s results and find better businesses and industries to invest in.

Government scrutiny and chronic law suits, owed to their shady business practices, has pressured the for-profit education industry. Those yet to file for bankruptcy protection are on the brink of doing so. For others like DeVry Education (NYSE:DV), the third-largest for-profit education company, international expansion becomes an option. But doing so only attracts more risk than already existed.

With shares already plummeting some 36% in the first half of the year, against flat gains for the broader market, shares of Downers Grove, Ill., continues to be one of the worst performers in the S&P 500 (SPX) index, which is down just 1% on the year. But ahead of DeVry’s fourth-quarter fiscal 2015 earnings results, which is due out Tuesday after the close, things can still get worse for the stock. And this is despite shares already trading at their 52-week lows.

Like a handful of its peers, including Apollo Education Group(NASDAQ:APOL) — operator of University of Phoenix — DeVry, which is expected to report declining profits, continues to suffer from slumping student enrollment. There are too many for-profit companies competing for a diminishing pool of students. Therefore, these companies that have been accused for predatory lending and leaching off the government, can’t make any money.

Complicating matters, now the government — based on President Obama’s proposal to make community college free to students for the first two years — may become the industry’s biggest competitor, lowering the companies’ chances of survival.

In the case of the DeVry, which first entered Brazil in 2009, it wants to take its business further overseas, expanding even more in Latin America. Having closed some 14 of its U.S. campuses, the company — believing it can find a larger base of students it can sell its services to — is increasing its bet outside the U.S, growing its campuses to 11 in Brazil.

To its credit, DeVry’s Brazil division has grown almost 40% year over year above 2014 levels. This is because, Brazilian graduates that hold higher education degree, earn 2.5 times more money than their counterparts without a degree. This is what DeVry is betting on.

At the same time, the for-profit education industry in Brazil is just as saturated as what exists in the U.S. Apollo Education, via a recent acquisition, has already established a large footprint in Brazil. So execution by DeVry will be key to its survival. And with the company’s fiscal 2016 earnings estimates projected to decline more than 2% from 2015, DV stock carries more risk than before.

Even more daunting, the company must still grow the U.S. campuses that it has left. And to do so, it must convince new students they should pay for school at a time when the government can offer them the same — if not better education — at no cost. In that vein, I would be a seller of DV stock ahead of Tuesday’s results and find better businesses and industries to invest in.

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