New Oriental Education & Technology Group: Long-Term Buy But Wait For Price Action To Gain Momentum

Summary

• Thriving alongside a growing Chinese economy.
• No real fundamental risks.
• Very sound financial statements.
• Shares testing key technical support.

The business

New Oriental Education & Technology Group, Inc (NYSE:EDU) is a provider of private educational services in China. The company offers a range of educational programs, services and products consisting of English and other foreign language training as well as prep courses for tests such as the SAT and ACT. EDU shows continuous growth in the key metrics and despite shares being down 10% YTD, after returning 120% in 2017, the company is ready for another leg higher.

Performance

As I just stated, 2017 was a great year for EDU as share prices rose 120%. This rise in price was justified as the company has performed well in all the key metrics. The company's fiscal year ends May 31 and for their 2017 fiscal year, they saw revenue increase 21.72% over the prior year's 18.57%. This trickled down to the bottom line where EPS grew a whopping 32.62% over the 16.53% in 2016. EBITDA also increased 30.31% YoY along with net income rising 32.98% in that same period.

(Source: Thomson Reuters Eikon)

The company shows consistent YoY growth in all of the key metrics. The only metric that the company did not see YoY growth in, is their gross profit margin which declined 0.10%. Despite this number, the company still has an impressive gross margin of 58.34%. So a small decline should not impact the company much, if at all.

(Source: Thomson Reuters Eikon)

This performance is expected to continue going forward as estimates for 2018 contain a YoY revenue increase of 32.9%, EBITDA growth of 10.98%, net income is expected to rise 17.84% and EPS estimates are $2.20 per share which would be a 17.72% increase from 2017.

Strength and weaknesses

China's economy continues to grow and according to the company's most recent 20-F filing, "The overall economic growth and the increase in the GDP per capita in China have led to a significant increase in spending on education in China." This is clear when reviewing the company's YoY revenue growth. The company also maintains an ROE of 17.8%, which exceeds the peer group's average of 11.2%. Along with this, EDU's quick ratio is 1.91, also above the peer group's 1.11. Combine these metrics with the past performance that I mentioned above and it's safe to say that EDU is a very healthy company. They deliver to their shareholders while staying on top of their ability to pay off any short-term debts.

There's not many weakness to point out for EDU. If I had to nitpick, I'd again point out that the company's gross profit margins have decreased slightly YoY and have been slowly declining since 2010. Despite this, they still maintain their margin around 58%, which is better than the industry's 54%.

Risks

The company's ability to generate revenue largely depends on their ability to attract paying users to their online courses as well as increasing enrollments at their physical schools. This can be effected by the overall economy in China. Although I don't see this as an imminent risk at the moment, as China's GDP continues to grow at a very hot pace, it is something to keep in mind. Other than this, EDU is very sound fundamentally and does not have much risk associated with it.

Looking ahead

As the company shows no real weakness at this time, the forward outlook is bullish among analysts. Of the 27 analysts covering the stock, 100% of them are positive with 2 ranking the company a HOLD, 18 ranking a BUY, and 7 ranking a STRONG BUY. The average price target between them is $107.48. This leaves a 25% upside from current share prices. I have a personal twelve month target of $117 for EDU. The rapidly expanding Chinese economy will have a great effect on the company as families will be able to put more emphasis on getting their children a good education and getting them into the growing workforce.

(Source: Thomson Reuters Eikon)

Currently shares are trading at a P/E of 47.56 and maintain a forward P/E of 29.9. Compared to the current P/E of 33.2 for the industry, the company is slightly overvalued and yet with a PEG of 1.50, there still remains some upside potential.

Technicals

As of the writing of this article, shares of EDU are trading at $86.05. This puts the price just off the 200 day moving average which also coincides with some key support. Although I remain bullish for the long-term, this level will need to hold for me to maintain my bullish sentiment for the near-term. If this support does fail in the coming sessions, I will look for a clear reversal signal that provides evidence of turnaround and a move towards my price target before initiating any position.

(Source: ThinkorSwim/TD Ameritrade)

EDU is a very fundamentally sound company. They have thrived alongside China's hot economy and will continue to do so going forward. As I stated in an earlier section, there's not many fundamental risks associated with this company, and because of that, I'll be leaning on the technicals when adding this one to my portfolio. The key levels to watch are the 200-day moving average support and the resistance in the area of $94.50/$95. A crack to the downside will have me waiting for shares to find a significant bottom before moving higher, but if shares crack resistance from here, I believe we see new highs within the 6 months following.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[D. McDevitt]

Just found this company. Now I'm looking for a downside while scrounging together some capital.