Market punishes DeVry, other for-profit colleges
BY FRANCINE KNOWLES Business Reporter email@example.com July 24, 2012 6:00PM
Exterior of DeVry University on July 24, 2012. | Al Podgorski~Chicago Sun-Times
Updated: August 26, 2012 6:20AM
These are challenging times for Downers Grove-based DeVry Inc. and other for-profit colleges, who watched their shares sink Tuesday a day after DeVry said its fiscal fourth-quarter profit will be well below analysts expectations as enrollment sank and it announced plans to slash 570 jobs.
DeVry’s shares plummeted nearly 25 percent Tuesday after it forecast earnings of 43 cents to 46 cents per share before special items — well below the 79 cents per share analysts were expecting. DeVry dropped $6.76, closing at $20.80.
“It seems like the company has basically had to discount their tuitions in order to get more people to sign up,” said Morningstar Inc. senior analyst Peter Wahlstrom.
Not only were enrollments down, “but you had to entice somebody to actually enroll,” he said. “The market extrapolated that across the industry.”
Indeed, shares at Schaumburg-based Career Education Corp. sank nearly 10 percent (down 53 cents to $4.80), and shares of Apollo Group, which owns University of Phoenix and has a large presence in the Chicago area, fell nearly 4 percent (down $1.11 to $27.81).
DeVry, which will release its earnings for the fiscal fourth quarter ending June 30 on Aug. 9, said Monday revenue fell short due to increased use of scholarships in its May and July classes and that it incurred higher than anticipated operating costs, including increased spending on recruitment.
New enrollments fell nearly 20 percent in the spring term and are expected to fall 15 to 17 percent in the summer term, DeVry said. The 570 jobs cut represent a reduction of about 5.4 percent of the company’s 10,500 workers.
Enrollments across the sector have been down for at least the last 12 to 18 months, Wahlstrom noted.
That’s a far cry from the glory days the sector experienced in the last decade. For-profit colleges benefited from increased Pell Grant funding, historically low borrowing rates, increased online course delivery options and the U.S. economic downturn, Walhstrom noted in a recent report.
Most companies posted double-digit annualized gains in enrollments and profits by targeting the historically underserved market of working adults with little or no more than a high school education, Wahlstrom said.
But the sector has come under increased regulatory scrutiny and drawn criticism for graduating students saddled with high tuition debt they can’t pay and degrees and certificates that too often haven’t led to gainful employment.
The Department of Education has said students at for-profit institutions represent 12 percent of all higher education students, but 26 percent of all student loans and 46 percent of all student loan dollars in default.
“These colleges are now being tasked with measuring the amount of student debt that the students will actually accumulate, and they’ve also got to show a certain level of competency in terms of repayment rate for their loans,” Wahlstrom said.
Under new rules of the Department of Education, the schools also have to show that a certain percentage of graduates actually land gainful employment. Schools that do not meet new standards of debt limits and employment risk losing federal financial aid.
Meanwhile, the schools are facing increased competition amid the bad publicity.
“There’s a lot of scrutiny,” said Wahlstrom. “There’s a lot of uncertainty. They’re changing a lot of things. Enrollments are down.”
Meanwhile perspective students are wondering “Can I get a job? Is that degree worth anything. There’s just a lot of questions that were raised,” he said.
Still, while the short-term outlook is challenging for the sector, longer term the outlook is more positive for single-digit growth, he contends.
“These schools should be able to grow at the overall rate of the U.S. population growth and education growth, and then take a little bit of share,” he said. “They could grow their student base by 3, 4, 5 percent over the long term.”