Educational Profits in China

04/15/2014 11:00 am EST

Focus: GLOBAL

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

 

Our latest featured value stock is incorporated in the Cayman Islands, but its headquarters are located in Beijing; it is the largest provider of private educational services in China, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

New Oriental Education & Technology Group (EDU) offers a wide range of educational programs, services, and products, including English and other foreign language training.

It also offers test preparation for both admission and assessment tests in the United States and other countries, primary and secondary school education courses and online education.

Demand for education in China is partly driven by low-wage workers desiring to move into the middle or upper class. Sales increased 21% and EPS soared 60% during the 12 months ended November 30, 2013.

Strong demand for after-school tutoring programs and the closing of several underperforming learning centers bolstered results.

I expect sales to rise 19% and EPS to climb 30% during the next 12 months ending November 30, 2014. Continued strong demand for New Oriental’s tutoring programs and the opening of about 25 new learning centers will enhance sales and earnings.

In addition, management’s focus on integrating online and offline curriculums and expansion of online choices will provide continued rapid growth.

EDU's stock price has pulled back from a high of $34.50 in mid-January. The decline has been caused by worries that the slowing Chinese economy will negatively affect demand for New Oriental’s education services.

However, demand usually increases during slowdowns, because citizens desire to improve their education to achieve better jobs.

The current P/E of 23 is somewhat high, but the company’s growth is impressive. Its balance sheet is pristine with no debt and lots of cash to fund future expansion. EDU will likely reach my minimum sell price target of $42.17 within one year.

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