We expect DeVry Education Group Inc. (DV) to beat expectations when it reports first-quarter fiscal 2015 results on Oct 23. Last quarter, the company delivered a positive earnings surprise of 4.29%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that DeVry is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +32.26%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: DeVry carries a Zacks Rank #3 (Hold) which, when combined with +32.26% ESP, makes us confident about a positive earnings beat.
Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-Than-Expected Earnings?
Strong revenue growth and margin expansion in DeVry’s healthcare and international segments are mitigating the challenging environment for the flagship DeVry University and driving top and bottom-line growth.
DeVry’s revenues and earnings are being driven largely by its healthcare and international businesses — Chamberlain, Ross, Becker and DeVry Brasil. These institutions have shown significant improvement in revenues and profitability in all the quarters of fiscal 2013 and 2014. Especially, Chamberlain and Ross are gaining from strong demand for jobs in the healthcare fields across the U.S.
However, the core business — the DeVry University — accounting for almost half of the company’s revenues, has been recording enrollment declines and lower revenues. Enrollments have been going down due to weak macroeconomic environment and subsequent decline in student demand (due to the hesitancy over taking a loan). DeVry University starts have been declining for several years and are expected to remain a challenge in the near term as well since prospective students are apprehensive of pursuing a higher degree and the job market. The competitive landscape is also intense.
In order to boost enrollment growth, the company is offering scholarships and other operational initiatives. However, such efforts put pressure on revenue per student and thereby, profitability.
For the first quarter of fiscal 2015, DeVry expects revenue growth from all the institutions except DeVry University. Revenue growth is expected to be modestly positive in the quarter similar to the last reported quarter. Revenue per student is expected to be flat to slightly down.
The company expects operating cost to increase year over year in the first quarter due to investments in the growth institutions.
Other Stocks to Consider
Other stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:
K12, Inc. (LRN), with an Earnings ESP of +9.09% and a Zacks Rank #3.
ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA), with an Earnings ESP of +1.21% and a Zacks Rank #2 (Buy).
The Hershey Company (HSY), with an Earnings ESP of +2.78% and a Zacks Rank #3.
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