New Oriental Education & Technology: Earnings Catalyst Coming Tuesday

by: Option Dragon

New Oriental Education & Technology Group (NYSE:EDU) provides private educational services based on the number of program offerings, total student enrollments, and geographic presence in China. The company also operates various online education programs on its website

Last week, Apollo Group (NASDAQ:APOL) did very well on its earnings report and jumped the $10+ points expected after its open and EDU could theoretically do the same. The stock data supports a volatile move. The float of the stock is under 37 million shares which can support a volatile move, but the short ratio and shares short is very low compared to other high beta low float, high short ratio stocks with only about 506,000 shares short and a 0.7 short ratio.

With a possibility of a China slowdown, educational services could be immune to the domestic economy. China exports rose at the slowest pace in 2 years from $26.2 billion in November to $22.7 billion in December, going into the U.S. holiday season. The rising yuan, the cooling global economy, and fewer export subsides have contributed to the slowdown.

China’s M2 money supply also had its smallest gain in 7 months. You can still find secular bull markets within one of the fastest growing economies in the world if you dig a little deeper and EDU fits that bill. According to the IBD, EDU is a big beneficiary of a huge population that is eager to learn English and to learn new technical skills. Public schooling cannot keep up with the growing demand and people are turning to private educators to fill the void.

EDU’s management is also very intelligent about distribution of its services and data by striking deals with companies such as Heinle ELT, Thomson Learning and Nokia (NYSE:NOK). The partnership with Nokia and Thomson Learning helps EDU’s wireless strategy by sending lessons to cell phones. EDU recognizes the bottleneck of physical barriers to enrollment and content distribution and has created online and wireless programs in order to circumvent these constraints.

Average analyst estimates call for $0.08 a share for the current quarter with a high of $0.10 per share. This estimate has risen from $0.07 a share 30 days ago. The current estimates translate into year over year earnings growth of 166% from its year ago EPS of $0.03. Revenues for the current quarter are expected to be about $30.68 million from $21.58 million last year. Revenue estimates for next quarter, current year and next year are all growing at a healthy 30%+ from a year ago. Last quarter EDU beat earnings estimates by $0.08 and traded about $10 from the previous close after the great earnings announcement.

I do expect volatility and previous historical evidence indicates this as a high probability. If they miss on earnings and/or lower guidance, their share price could drop $5+. I have a directional bias of being long and will try to effectively strangle overweight calls and possibly hybrid a pre-earnings IV play into a “houses” money direct earnings catalyst strangle. Strike price, weighting and the risk/reward ratio could change depending on price volume action, technicals and analyzed market sentiment going into the earnings event scheduled for January 15th - Tuesday morning. The position must be built before the end of Monday to have exposure to the earnings catalyst on Tuesday morning.

I expect EDU to beat on revenue and earnings estimates. This company is hitting on all cylinders and analysts are noticing by raising EPS estimates since last earnings from $1.16 in the current year to $1.27 and $1.58 for next year to a consensus of $1.79 now. The technicals have shown strength and has been levitating above the gap from last earnings at $76.

Apple (NASDAQ:AAPL) will be a big focus this week to the long side but it could be very volatile before and after the event with the presentations of new products and Steve Jobs’ key note address which could include insight into AAPL’s earnings on January 22nd.

Genentech (DNA) on Monday, California Pizza Kitchen (NASDAQ:CPKI) on Tuesday, Intel (NASDAQ:INTC) on Tuesday, Citigroup (NYSE:C) on Tuesday, Logitech (NASDAQ:LOGI) on Wednesday, JP Morgan (NYSE:JPM) on Wednesday, Wells Fargo (NYSE:WFC) on Wednesday, IBM (NYSE:IBM) on Thursday, Washington Mutual (NYSE:WM) on Thursday, Seagate (NASDAQ:STX) on Thursday, Parker Hannifin (NYSE:PH) on Thursday, Merrill Lynch (MER) on Thursday, Blackrock (NYSE:BLK) on Thursday, Schlumberger (NYSE:SLB) on Friday, General Electric (NYSE:GE) on Friday, and Johnson Controls (NYSE:JCI) on Friday.

I like PH, SLB, STX,and JCI as Post-event IV Implosion Gap Trades. I like LOGI as a Pre-IV and Direct Earnings catalyst play. Market sentiment will weigh heavily and impact all earnings and news. There are many cross currents during this week with financial companies reporting earnings, PPI (PPI) coming out on Tuesday, Capital Properties (NYSEARCA:CPI) coming out on Wednesday and the Fed’s Beige Book on Wednesday. Let’s just say it is going to be a fluid situation and the market will move and price in new and unexpected news as it comes.

Influential think tank Medley Global Advisors is expecting a cut as early as this week from the Fed, a source told Reuters. The possibility could be higher once the CPI and PPI numbers are known, but it is only an expectation and gaming the Fed is not advised. Trade with what is in front of you and manage your risk properly on overnights, especially short positions.