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New Oriental: Educated Gains

03/06/2014 10:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Education is a primary issue in China. Urban Chinese families spend more than 30% of their household income on their child's education, compared with only 2% in the United States, observes Mark Skousen, editor of Fast Money Alert.

Millions of Chinese are learning English, the international language of commerce, and preparing for exams. Those are the two principal occupations of New Oriental Education & Technology Group (EDU).

The company is China's largest private educational services provider. Based in Beijing, EDU was founded in 1993 and offers educational programs with 17,000 teachers in 57 schools and 669 learning centers.

It also owns thousands of bookstores throughout China (a big business there). It offers counseling, language training courses, and after-school tutoring.

Business is booming. In its most recent quarterly report, enrollment rose 12%, revenues jumped 25% to more than $1 billion, and operating income more than doubled. EDU enjoys a 17.7% profit margin and return on equity (ROE) of 21%. It has no debt and more than $1 billion cash in the bank.

The stock price tanked in 2012 after an investigation by the Securities and Exchange Commission, but it has bounced back. It is selling for 20 times expected earnings.

Most analysts think it could hit $40 a share this year. There are rumors that the CEO will take the company private at a higher price.

The announcement affected the entire private education market, including overseas markets. But it is a stretch to suggest that such a ruling will hurt private education programs in China.

The stock has done particularly well in March and April, advancing significantly in those months 90% of the time during the past seven years.

Many analysts now consider EDU “oversold” and a good buying opportunity. Let's buy New Oriental Education at market and set a protective stop of $26 a share.

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