Kohl’s, DeVry: Predictability Comes at a High Price
Kohl’s (KSS) *
Jim: Buy
Mike: Don’t Buy
Jim: Both of our stocks today are very interesting, Mike.
Mike: Are you putting quotes around the word “interesting” as though to say “look out below?”
Jim: No, I think they’re both notable because--with so many investors still obsessed with sexy, high-priced tech stocks that are constantly touted on CNBC and elsewhere--here we have two companies, starting with Kohl’s, that are . . .
Mike: Unsexy, high-priced stocks?
Jim: Exactly. Kohl’s is a middle-market department store chain based in Wisconsin, of all places, and its stock has been making Cisco Systems and Intel look like pikers.
Mike: Right, this is a stock whose price-to-earnings multiple is, get this, 55 times the per-share profit the company is expected to earn in its fiscal year ending in January 2002. You’d think we were discussing Amazon.com.
Jim: But Kohl’s, which has about 320 stores in 26 states, delivers year in and year out, which is why investors put a premium on its stock price.
Mike: We should point out for our California readers, who may never have heard of this company, that this is one of the few retailers that didn’t decide to expand into Southern California in the last two decades.
Jim: But that could soon change.
Mike: True, Kohl’s reportedly is poking around for possible store sites in the region. But here’s the interesting thing . . .
Jim: Interesting? As in . . .
Mike: Never mind that. Kohl’s specializes in relatively small stores, such as those in shopping malls. In fact, because Montgomery Ward is going out of business, owners of its buildings are pursuing Kohl’s to fill those spaces. But they’re likely to be disappointed in their quest, because a typical Ward’s building is a lot larger than Kohl’s likes.
Jim: Kohl’s is quite a story. It has recorded more than 34 straight quarters of higher sales and earnings, and it’s considered a master of not only expanding wisely but also of managing its inventories and costs while providing good value to customers. All of which bolsters its financial results.
Mike: Which was evident in December, when most retailers had a pathetic sales season.
Jim: Right. Kohl’s same-store sales in December--sales of stores open at least a year--soared nearly 15% from a year earlier. Simply remarkable.
Mike: But I have a problem with Kohl’s, and I think I hear the same problem in your voice, if my antenna is working. Last week, when we talked about Men’s Wearhouse, we liked its low price-to-earnings multiple, which made it a value play. Here we’ve got the opposite situation. And although Emerson said “a foolish consistency is the hobgoblin of little minds,” I’m going to be consistent and say, look, despite all the reasons we like Kohl’s, this stock is too expensive.
Jim: Sorry, your antenna isn’t working. I like the stock. Kohl’s deserves its high valuation because it has the track record to support it. Kohl’s keeps coming through with superb numbers, regardless of the economic backdrop. Earnings surged 41% in the nine months ended Oct. 28.
Their execution is so good that I’d buy the stock even at these levels.
Mike: Not me. At this price, and given the slowing economy--interest rate cuts by the Fed or no--the beagles are beginning to bay around Kohl’s. If this outfit were to miss Wall Street’s earnings projections by even a penny, the stock would be taken down so ferociously you wouldn’t know what hit you.
Jim: But I have no reason to think Kohl’s will come up short. The economic slowdown was well underway in December, but look at how Kohl’s performed.
Mike: Maybe these guys are so good that they’ve dodged the freight train. But I worry that the train has just been held up at the crossing for a while, and that it’s still coming straight at Kohl’s.
DeVry (DV)
*
Jim: Don’t Buy
Mike: Don’t Buy
Jim: Now, as I said at the start, here’s another arguably dull company whose stock is anything but dull. You take a 10-year chart of DeVry’s stock and it almost matches that of Kohl’s--meaning it goes nearly straight up.
Mike: If you were a market analyst who studied nothing but charts, you might find some reason for these two companies to be connected. Maybe as retail sales continue to rise, people go for more technical training?
Jim: That’s why you shouldn’t just study stock charts.
DeVry operates 19 technical training institutes in the United States and Canada, including three in the Los Angeles area.
Mike: Let me jump in and say that I’ve been investigating the technical training business a little bit, and . . .
Jim: You looking for work?
Mike: For news reasons, Jim, news reasons. Anyway, people in this industry like to characterize it as a battle to see who is the tallest dwarf--meaning there are a lot of competitors and none of them has a dominant market share.
Jim: So what?
Mike: That means it’s very costly to compete.
Jim: The industry might be fragmented, but DeVry has the brand recognition to help keep it growing.
Mike: The company also has 36 campuses of its Keller Graduate School of Management--named after its chief executive. Taken together, DeVry offers everything from technical diplomas--which enable you to sell yourself as a network technician, an information technology technician, what have you--all the way up to professional certifications such as certified public accountant and master’s of business administration.
Jim: Right, DeVry is about much more than learning how to tear down a computer.
Mike: It has the whole range. But I’m still a little nervous about this stock.
Jim: Before we discuss your neurosis, let’s note that DeVry has posted some good numbers lately, with double-digit gains in sales and earnings--in good part because of strong growth in tuition revenue. The stock has done quite well too. But I must tell you, I’d avoid buying it now.
Mike: That hobgoblin finally showed up on your doorstep.
Jim: Let’s put it this way: Even though DeVry stock also has a high price-to-earnings multiple--about 43 times the per-share profit the company is expected to earn in its fiscal year ending in June--I don’t have as much faith that DeVry can sustain its growth as I do with Kohl’s.
I also agree with you, Mike, that DeVry is running headlong into competition. It’s also making a push into online learning that will require considerable upfront costs.
Mike: As we noted, there are lots of rivals in the technical training field, from private operations such as DeVry to public universities to programs sponsored by industry. They’re all training people. But I detect a growing concern among consumers about the real value of some of these educational programs.
Jim: DeVry’s gains in tuition revenue indicate many people find it useful.
Mike: Fair enough. But you have to wonder, if we are in an economic downturn, whether there will be enough demand by employers for the thousands upon thousands of students being turned out by DeVry and its rivals.
Jim: That’s true, but one could argue that with the job cutbacks we’re seeing, especially in the technology sector, a lot of people might go to DeVry to bolster their skills to give themselves a better chance in a weakening job market. Wouldn’t you say?
Mike: Perhaps. Or perhaps not. If the P/E ratio of this stock were 12, I’d be inclined to say, “Well, what the heck!” But it’s not.
Jim: That’s where we agree. The price of this stock holds me back, because it’s very rich for an outfit that I say will be hard-pressed to maintain its recent growth rates.
But I will hand it to DeVry: It’s been through lots of economic cycles over the last decade, and just like Kohl’s, its performance and stock price have kept heading higher. That says a lot about DeVry’s management skills and its services, which apparently people are still seeking in big numbers.
*
Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael .hiltzik@latimes.com) covers technology and entertainment.
