China Education Alliance's Glory Days Are Over

Feb.13.08 | About: China Education (CEAI)

China Education Alliance (CEUA.OB) issued its guidance for FY2008 Tuesday, projecting a net income of $8.5-$11.0 million and fully-diluted EPS of $0.32-$0.41 per share.

Somehow I'm not very excited by this, despite the fact that the company took great pains to tell us that the guided EPS is fully diluted. I almost take it as a given. More importantly, I'm expecting a net income of up to $7.0 million this financial year, and taking the low end of the guidance (to be conservative), the company is projecting a mere 21% bottom line growth. Similarly, taking the low end EPS, the would-be expansion rate is a ho-hum-ish 23%.

But let's say it is the high end that ultimately results. Well, that figure is approx. 66% for both net income and EPS growth. Compare that to the expected EPS expansion of approx. 500% between 2006 and 2007, a net income growth of approx. 166% over the same period. In other words, the company's glory days are quite over. CEUA is clearly still growing and making good progress, but no longer at a triple digit rate.

So what, you ask. Isn't a 66% growth rate extremely respectable? It is, but one has to look at the company's valuation in the context of some of the other C.O.P. companies.

In fact, there are two C.O.P. companies expected to generate an EPS of roughly $0.40 this financial year - China Pharma (NASDAQ:CPGI) and China 3C Group (CHCG.OB). Both companies' shares are currently trading at below $3, while CEUA closed Tuesday at $3.35. Is there a premium attached to the education sector? Perhaps so, but I don't really see any justification, for there appears to be little difference in the potential forward growth rates of these companies. In fact, if anything, retail (the sector CHCG is in) should be the one getting the premium.

Given this, I suspect CEUA's shares are going to be trading sideways for now, at least, until its FY2007 results come in in late March.

My Position: Long CHCG.OB and CPHI.OB.