Fess up, Mr. Market: What were you thinking?
I'm referring, of course, to the 13% bonus you gave for-profit educator DeVry (NYSE:DV) as a reward for some pretty darned shabby numbers in its fiscal second-quarter 2005 report last week. Let's review those quarterly numbers.
- New student enrollments declined 6% year on year, while total enrollments fell by 8%.
- The student population shifted toward part-time students who contribute less revenue, and away from full-time students who contribute more.
- Meanwhile, the cost of educating those students increased 6% year on year.
- Revenues for the past six months declined 1% in comparison with the year-ago period, and this slide in revenue accelerated to a 2% decline in the second quarter.
- Profits per diluted share for the first half of fiscal 2005 declined 62% against 1H 2004. That slide, too, accelerated in the second quarter, resulting in a 64% decline in per-share profits.
- Free cash flow for 1H 2005 fell 24% against the year-ago period, down from $63.3 million to $46.6 million.
I'm at a loss to explain what was to like about that earnings release. Yes, the company offered voluntary separations (i.e., cash buyouts) to a few dozen teachers in Q2. Yes, DeVry plans to offer the same deal to a few dozen more teachers in Q3 and to involuntarily lay off about 75 more teachers as well. And three times yes, all this slashing and burning should save the company $10.5 million per year in salaries and benefits.
But that's just a little over $2.6 million per quarter. If you added this quarter's $2.2 million in buyouts back in, and also added in the $2.6 million in expected future salary savings, DeVry still would have posted a 32% reduction in profits for Q2 2005. Call me a Fool, but that kind of result just doesn't seem to necessitate a 13% increase in market valuation.
If there was any method to Mr. Market's madness last Friday, I can only guess that it was this: The worse DeVry does, the less viable it is as a standalone business. The less viable it is alone, the more likely it is to ultimately succumb to an acquirer's overtures. And if that happens, DeVry's shares should finally sell for a premium. So maybe Mr. Market is crazy -- but like a fox.
Read up on the ways desperate companies like DeVry fight off takeover attempts:
Fool contributor Rich Smith has no position in DeVry.
