Don't Get Schooled By DeVry

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

DeVry (NYSE: DV) was up over 16% earlier this month on better than expected quarterly earnings. The for-profit education company has seen its stock soar over 55% the last six months. Are there still opportunities for this education company to go higher? Maybe not, but I believe there is one company in the industry that could be a solid buy. 

DeVry’s recent run up was a result of higher profits, thanks in part to lower costs. Its quarterly earnings were up to $50 million, or $0.78 per share, from $9 million, or $0.13 per share for the same quarter last year. This number beat analysts’ expectations handily, which were $0.56 per share. This positive news comes despite the company’s struggles with poor enrollment growth, which has previously played a key role in the EPS growth (sequentially) of 26%, 24%, 56%, and 41% in the prior four quarters. 

Although earnings did beat estimates, the details of the recent earnings announcement show that DeVry's quarterly sales fell 3.6% and enrollment was down 5.4% year over year. What's more is that full year 2013 (ending June) earnings are expected to come in 20% below 2012 EPS (check out DeVry's company profile).

Like I said, I don’t think DeVry is the best play in the for-profit higher-education industry, and when looking at the company's valuation this becomes even clearer: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Earnings (next year earnings)</strong></p> </td> <td> <p><strong>Price to Sales</strong></p> </td> </tr> <tr> <td> <p>DeVry</p> </td> <td> <p>11.5</p> </td> <td> <p>0.95</p> </td> </tr> <tr> <td> <p>American Public Education</p> </td> <td> <p>15.2</p> </td> <td> <p>2.36</p> </td> </tr> <tr> <td> <p>Apollo Group</p> </td> <td> <p>7.9</p> </td> <td> <p>0.56</p> </td> </tr> <tr> <td> <p>Corinthian Colleges</p> </td> <td> <p>7.7</p> </td> <td> <p>0.13</p> </td> </tr> <tr> <td> <p>Strayer Education</p> </td> <td> <p>12.1</p> </td> <td> <p>1.27</p> </td> </tr> </tbody> </table>

Apollo Group (NASDAQ: APOL) is my pick as the best stock in the industry and a potential buy for investors. It is one of the cheapest stocks in the industry, on both a price to earnings and price to sales basis. Meanwhile, it has better expected growth than top competitors DeVry and Strayer Education (NASDAQ: STRA):

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>5-Yr. Expected EPS Growth (Wall Street estimates)</strong></p> </td> </tr> <tr> <td> <p>DeVry</p> </td> <td> <p>8.90%</p> </td> </tr> <tr> <td> <p>American Public Education</p> </td> <td> <p>15.50%</p> </td> </tr> <tr> <td> <p>Apollo Group</p> </td> <td> <p>10.20%</p> </td> </tr> <tr> <td> <p>Corinthian Colleges</p> </td> <td> <p>17.70%</p> </td> </tr> <tr> <td> <p>Strayer Education</p> </td> <td> <p>9.50%</p> </td> </tr> </tbody> </table>

Although Corinthian Colleges (NASDAQ: COCO) offers investors solid growth opportunities at an attractive valuation, the company is fundamentally different from online educators, where it operates campuses across the country. As a result, Corinthian has returns (ROI and ROE) that is subpar to some of the major operators. Recent quarterly results for Corinthian showed total new students enrollment fell by 4% year over year.

Digging even deeper, DeVry has been struggling with respect to return metrics: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Return on Investment</strong></p> </td> <td> <p><strong>Return on Equity</strong></p> </td> </tr> <tr> <td> <p>DeVry</p> </td> <td> <p>10.80%</p> </td> <td> <p>11.40%</p> </td> </tr> <tr> <td> <p>American Public Education</p> </td> <td> <p>27.30%</p> </td> <td> <p>20.00%</p> </td> </tr> <tr> <td> <p>Apollo Group</p> </td> <td> <p>29.90%</p> </td> <td> <p>38.60%</p> </td> </tr> <tr> <td> <p>Corinthian Colleges</p> </td> <td> <p>4.70%</p> </td> <td> <p>5.60%</p> </td> </tr> <tr> <td> <p>Strayer Education</p> </td> <td> <p>47.10%</p> </td> <td> <p>131%</p> </td> </tr> </tbody> </table>

American Public Education (NASDAQ: APEI) also operates in the industry as one of the smaller online educators, with a sub-$1 billion market cap. The company reported recent third quarter 2012 earnings of $0.60 per share, beating consensus estimates of $0.50. Total revenue was also up 18% year over year. Although American Public Education has performed well, its valuation is now at the top of the industry.

Strayer posted third quarter 2012 earnings of $0.36 per share, which was better than the company's expected range of $0.30 to $0.32. Yet, this is not as impressive as it sounds, as it was still down from the EPS of $1.20 that the company reported for the same quarter last year. Again, much like DeVry, low enrollment is plaguing Strayer, where total enrollment for the 2012 fall term was down 5% year over year.

Apollo is the industry leader in the U.S. private education and has one of the best recognized names in online education, University of Phoenix. Apollo has also been working on various cost saving initiatives, including layoffs and campus closings, where the company aims to decrease its ground location square footage by closing 115 locations by the end of fiscal 2013. 

Don't be fooled

Industry regulation changes have impacted the enrollment numbers for for-profit online educators across the board, but Apollo has the most attractive valuation and return metrics to make it a compelling buy. Of all the major online education companies, Apollo is the only one that trades at price to earnings to growth ratio of less than 1.0, implying that investors can buy the stock and its potential earnings growth at a reasonable price. 

mhargra has no position in any stocks mentioned. The Motley Fool recommends American Public Education. The Motley Fool owns shares of American Public Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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