Top Mid-Cap Gainers From Wednesday and What to Expect Now

Includes: EDU, FNSR, MSM, NUS
by: Rash Menaria

The following is a list of major mid-cap gainers from Wednesday:



% Gain

New Oriental Education & Techno



Finisar Corporation



MSC Industrial Direct Co



Nu Skin Enterprises



Click to enlarge

Here are some specifics about these stocks and what to expect from them going forward:

New Oriental Education & Techno (EDU), the largest provider of private education services in China, gained close to 10% in trade. The stock has gained over 20% in the last 2 weeks.

The company is a leader in China and it offered tutoring and test preparation to approximately 1,810,000 students in FY10. The company's resources are focused on critical tests such as the Gaokao exam which is the sole factor in determining a student’s future education and career opportunity, thus giving pricing power to the company. The stock had seen intense selling post Q2 earnings on margin concerns due to increasing costs.

The company has raised teachers' salaries by ~10% y-o-y in FY11 and rental costs have also increased 10% y-o-y. However, this has been more than offset by a 15-20% y-o-y increase in prices which will likely result in better margins the year. The company’s EPS is expected to grow at a CAGR of ~28% in next 3-5 years. The stock is trading at a P/E of ~26x FY12e (ex-cash) and looks fairly priced at current levels. Although the business is going in the right direction, valuations keep us at the sidelines.

Finisar Corporation (FNSR), a company which designs, develops, manufactures, and markets optical subsystems and components, gained close to 9% in trade on value buying from investors. The stock has fallen over 30% in the last month and is now being looked at more favorably by the investors.

The investors have been worried about the inventory buildup by the telecom companies and pausing order flows. The stock seems to have already priced in a lot of these. Even though Ocalor (NASDAQ:OCLR), recently pre-announced its Q1 results, lowering previous guidance on account of inventory corrections, Finisar’s stock price reacted positively. The stock is attractively valued at a P/E of ~14x FY11e, but we still prefer to remain on the sidelines until any sign of stabilization occurs.

MSC Industrial Direct Co (MSM), a company which operates as a direct marketer and distributor of metalworking and maintenance, repair, and operations (MRO) supplies to industrial customers throughout the United States, gained over 6% in trade on strong Q2F11 numbers and above expectation guidance for Q3F11.

The company reported Q2F11 EPS at $0.78 (v/s consensus $0.70) and gross margin of 46.8% (v/s consensus 46%). The company also guided for Q3F11 EPS at $0.90-0.94 and gross margins at 46.8% +/- 20bps. The company managed to exceed the expectations on the back of better than expected government business, better price realization and superior sales force. The stock is trading at a P/E of ~20x FY12e and at EV/EBIDTA of ~11x FY12e. The price seems to have factored in most of the positives and we remain neutral on the stock at these levels.

Nu Skin Enterprises (NUS), a company which develops and distributes anti-aging personal care products and nutritional supplements worldwide, gained over 6% in trade due to re-iterated FY 11 guidance and a better than expected outlook for Q1F11.

The company announced that the Q1F11 revenues will be up 9% (v/s previously guided +4-7%) with currencies growth at 5% (v/s 2-3% guided earlier). The EPS for Q1F11 was raised to $0.52-0.54 from $0.50-0.53 guided earlier. The management also clarified that the negative impact of Japan (~30% of revenues) would be more than offset by the growth in other Asia Pacific markets.

The management expects the sales in Japan to come down by 7%, whereas the China and South Asian markets are expected to clock ~38% growth. The management reiterated EPS range of $2.25-2.35 for the full FY11. The stock is trading at a P/E of ~13x FY11e which is lower than that of its peers. The stock is a good buy at these levels given the positive growth outlook and cash flow situation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.