September 7, 2011
We believe the long-term prospects for our two remaining proprietary post-secondary holdings are bright. Current post-secondary enrollments are negative due to prolonged economic weakness and high unemployment, which have left prospective students reluctant to commit to a college education and the loans required to finance it. We also believe that enrollment trends are in the process of reverting to a more normalized mid to high single-digit level of year over year growth. Our two holdings in this space are DeVry, Inc. (DV), one of the largest regionally accredited providers and Strayer Education, Inc. (STRA), a smaller company that focuses primarily on degree completion of the working adult.
DeVry is a high-quality well-diversified provider, with great exposure to high-demand areas in healthcare and technology, and a foothold in the fast-growing Brazilian market. We think career training is the most defensible segment of the for-profit space. We expect that in a better economy, if long-term enrollment growth rates stabilize in the high single digits, which is not heroic, that DeVry can generate double-digit earnings growth. This would be similar to DeVry’s stock performance in the 1990’s when it enjoyed 40 consecutive quarters of approximately 20% earnings-per-share growth on average enrollment growth of 7.7%.
The timing and pace of a recovery in enrollment is similarly unclear for Strayer. The company is experiencing negative leverage on lower enrollments on its relatively fixed cost base, which we believe is largely priced into the stock. Under a strong management team, which has kept its focus on curriculum quality and positive student outcomes, and followed a path of controlled growth, we believe that the model will again flourish, that students will continue to seek and be able to fund a Strayer degree, and that the company will, over time, be successful in filling out its geographic footprint to become a much larger national player from its current 20 state base. We think Strayer should be able to achieve mid- to high-teens EPS growth, through a combination of topline single-digit enrollment growth, modest tuition increases, operating leverage and free cash flow deployment. In our view, this should support a P/E multiple of at least 20 times.
These are our views as of the date above. Our views are subject to change.
Investing in securities is subject to risk. Fund shares may fluctuate in value.
Baron Funds Percentage Ownership of DeVry, Inc. and Strayer Education, Inc. as of June 30, 2011
| Fund |
Company |
Percent of Net Assets |
Top Ten Holdings |
| Baron Asset Fund |
DeVry, Inc. |
2.5% |
View |
| Baron Growth Fund |
DeVry, Inc. |
3.1% |
View |
| |
Strayer Education, Inc. |
1.3% |
|
| Baron Small Cap Fund |
Strayer Education, Inc. |
0.9% |
View |
| Baron Partners Fund |
DeVry, Inc. |
3.5% |
View |
| |
Strayer Education, Inc. |
1.8% |
|
| Baron Focused Growth |
DeVry, Inc. |
2.1% |
View |
| |
Strayer Education, Inc. |
0.9% |
|
