Chinese private education service provider New Oriental Education (EDU) takes a dive after...


Chinese private education service provider New Oriental Education (EDU) takes a dive after CitronResearch says that based on Pearson's (PSO) $145M purchase yesterday of rival Wall Street English at a price-to-sales ratio of 2:1, shares of EDU ($47.60) may only be worth $14.25. EDU -5%.

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  • Jake Huneycutt
    , contributor
    Comments (1422) | Send Message
     
    Citron has a pretty good record historically, but I'm not totally convinced by their case with this one. Free cash flows look really good for EDU. Even assuming they bring in $1.50 next year with a 5% long-term growth rate, I come up with a valuation in the $48 area.

     

    Operating margin is pretty juicy at 24.5% for FY '08, so it is forseeable that more competition could come in and create margin pressure. Their margin was at 8% back in FY '06 and about 21% in FY '07. However, they seem to have benefitted from lower expenses (as a % of revenue) due to increasing size.

     

    I can see the case against it, but I'd also be afraid that they could continue to grow at a high rate. Even if margins are reduced significantly, they could still end up being profitable enough to justify a valuation in the $40-50 range.

     

    It's also worth noting that they have a massive cash balance, so they should have no problem expanding operations so long as there is demand.

     

    Would I pay $45 for this stock? No. But I'm more of a value investor and I don't like gambling on growth unless I see a high-potential growth stock that looks really cheap. I might consider it if it dropped to $25, but I don't think I'd short it either. Seems a bit on the risky side, but maybe Citron is right.
    16 Apr 2009, 01:11 PM Reply Like
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