DeVry Education (DV) , the nation's third-largest for-profit education company, will report second-quarter fiscal 2016 earnings results Thursday after the closing bell.
How the Illinois-based company performed in its last fiscal quarter will be secondary to what the future holds. And DeVry's future is no longer clear, thanks to a recent suit that alleges DeVry committed deceptive advertising was filed by the Federal Trade Commission.
Since then, DeVry stock has been hammered, plummeting 58.6% over 12 months to a new 52-week low of $18.15 in Tuesday trading. Investors have witnessed some 23% of their value disappear in the past week.
The FTC investigation fuels even more questions about the merits and long-term viability in the for-profit education industry. And it teaches investors another tough lesson: don't bet on certain stocks that appear too cheap.
In August I offered tons of reasons why, despite a cheap stock price and international expansion plans, things could still get worse for DeVry. At the time, DeVry stock had declined 36% in the preceding six months and traded around $27. The constant flow of negative headlines about the for-profit education industry and chronic slumping student enrollment both made selling the shares -- as I recommended -- make sense.
DeVry was already struggling to grow its student population. Now it may face competing with the federal government, since President Obama proposes to make community college free for the first two years.
To offset its declining student population at its various campuses, DeVry has ratcheted its promotional activities and marketing campaigns, claiming that 90% of its graduates who actively sought employment found new jobs in their majors within six months of graduation. Plus, DeVry claims that within a year of graduation, its former students earned 15% more pay compared to other graduates.
But these claims are at best deceptive, according to FTC. Some of the graduates in DeVry's figures are either working outside of their field of study or were entirely excluded from the count since they gave up on their job searches altogether, the FTC says. And that's yet another headache for an industry that has suffered one black eye after another.
As for its second-quarter results, ending in December, analysts forecast 66 cents a share on revenue of $457.85 million, compared to the year-ago quarter when it earned 75 cents a share on $484.88 million in revenue. For the full year, ending in June, earnings are projected to decline 4% to $2.39 a share, while full-year revenue of $1.82 billion would mark a 4.6% decline from last year.
With DeVry earnings and revenue in retreat and with little prospect of higher enrollment, we recommend avoiding DeVry shares. And at around $18 per share, DeVry could see its stock reach single digits as the weight of the government investigation grows more heavy.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.