Ariel Funds on DeVry Inc.
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Founded in 1931, DeVry Inc. is a leader in for-profit education, serving 120,000 students in the U.S. and abroad. The flagship DeVry University offers associate’s, bachelor’s and master’s degrees across a diverse set of program offerings, including business management, engineering, information sciences, liberal arts, media, technology and health sciences. Additionally, the company owns Ross University, Chamberlin College of Nursing and Carrington College, which complement the brand by offering post-secondary degrees in fields such as medicine, nursing and veterinary science. Combined, the company offers a great value proposition to a growing, underserved population. And yet, regulatory uncertainty surrounds DeVry and the industry.
An Ambitious Goal
Just two years ago, President Obama set an ambitious goal for America to regain global leadership in college education by 2020. With our nation facing both stubbornly high unemployment rates as well as a growing disconnect between newly created jobs and applicant qualifications, achieving this goal would be dramatic. Indeed, Bill Clinton recently stated that closing this skills gap would cut the unemployment rate by nearly 30%. With public budgets increasingly strained and private universities having limited capacity, for-profit education is the only option with the flexibility, access and quality necessary to help achieve this goal.
An Elegant Solution
The entire industry has been cast under a cloud of uncertainty as the Department of Education considers regulation to ensure high-quality education at a low cost. In our view, DeVry is a cut above, providing the highest quality programs to those in need. Students at DeVry have an impressive track record of earning valuable certifications and finding jobs, all at the most cost-efficient option to the taxpayer. Since 1975, nearly 90% of DeVry graduates have found employment within just six months. At Carrington College, the practical nursing pass rate was 95% last year, while the dental hygiene national boards pass rate was 100%. And importantly, according to DeVry, it costs the taxpayer just $2,400 per student in subsidies to achieve this kind of success versus $15,500 at a public-sector institution or $7,100 at a private university. Moreover, for-profit institutions invest $1 billion annually in new capacity—double the federal government’s budget—providing access to the non-traditional students who demand it most—ethnic minorities, first-in-family and working adults.
The Right Leadership
Chairman Dr. Harold Shapiro heads a leadership team that is well-equipped to navigate the current regulatory headwinds. As the former president of Princeton University and the University of Michigan, he provides a unique and valuable perspective on the vital role that for-profit education plays within the broader higher education system. As he put it best, “one of the strengths of the American system of higher education is its diversity of choice.” With Shapiro working alongside CEO Daniel Hamburger, the company is in rock solid financial shape, generating $3.60 in free cash flow per share annually and possessing $4.47 per share in excess cash on the balance sheet.
A Long-Term View
We view the negative headlines surrounding the for-profit education industry as a tremendous buying opportunity. DeVry’s stock price is overly pessimistic, reflecting the worst case scenarios facing its competitors, rather than the long-term demand for its own best-in-class programs. As of December 31, 2010, shares traded at $47.98, a 43.4% discount to our private market value of $84.76.