Like you, I generally avoid international stocks. The only
exceptions are rock-solid companies that also trade on US exchanges
as ADRs - American depository receipts. Google the term if you're
not familiar with it. One that meets these requirements and appears
to offer a very healthy upside is New Oriental Education &
Technology. The company is a provider of private educational
services in China with a primary focus on English as a second
Since opening its doors in 1993, the company has seen tremendous
growth and expansion. It operates a wide range of educational
programs including English, other foreign language training, test
preparation courses for admissions, assessment tests, secondary
school education and a development arm that distributes educational
content software, online education, and other technology.
As of the end of 2013, New Oriental operated 48 schools, 319
learning centers and 25 bookstores. They also employ more than
8,100 teachers in 40 cities. With the exception of a few full-time
primary and secondary schools, courses are generally designed to be
completed in two to sixteen weeks. As mentioned previously, the
majority of their programs are language based and help students
prepare for entrance exams to educational institutions in the U.S.
and other foreign countries.
While based and operated in China, the stock trades as an American
depository receipt (ADR) on the New York Stock Exchange under
ticker symbol EDU.
New Oriental (
) is far from a mom-and-pop shop. The company has a $4.15 billion
market cap and sees average trading volume of over a million
shares. EDU trades at 20 times trailing 12-month earnings which
while high for a value stock, is actually reasonable for a grower
like New Oriental. Analyst estimates put the forward P/E at just
This company has been a freight train of growth over the last
decade as seen by the unrelenting uptrends in revenue and profits.
The PEG ratio is 0.89. Since disciplined growth stock investors
seek buying opportunities when the earnings multiple is less than
the growth rate, PEGs below 1.0 are generally ideal if expectations
are for the company to continue expanding at a similar rate. Peter
Lynch is commonly credited with setting this criteria.
The balance sheet is beautiful. The company carries zero long-term
debt and has $1.15 billion in cash and securities as of the most
recent quarter. On a per-share basis, this means that New Oriental
holds $7.34 of its $26.32 share price in cold hard cash. And with
no creditors holding rights to any of it, that is a big safety net
for equity investors.
Deducting the aforementioned cash from the market value of the
security puts the P/E ratio at an even more attractive 12.3. This
is almost unheard of for a financially sound grower like EDU.
The beauty of this stock is that we really don't have to dig too
deeply with the analysis. Since there are no interest payments to
weigh down per-share earnings. the risk of insolvency is extremely
low. Selling, general and administrative expenses have adjusted
alongside revenues and it appears that the company has no problem
adjusting staff and expenditures according to sales. I would expect
a decline in revenue to be met with an equal reduction in spending.
This is a sign of a nimble company that can survive under varying
And while much speculation exists surrounding the future of the
Chinese economy, this sector is relatively protected from a
potential decline. With the world's largest population growing and
an accelerating global economy, the need for Chinese citizens to
learn second languages seems to be in no danger of decline. In
fact, most would expect exactly the opposite. While 319 learning
centers across the country might represent near saturation for a
smaller nation, it is a drop in the bucket for their population of
1.351 billion-more than three times that of the U.S.
These basic factors paint a convincing argument for not only
maintaining the company's current level of operations but a
continued growth of them.
Given that the company is obviously in no risk from excessive debt
or insufficient revenue, the next risk we would want to monitor is
that of increased competition and a dilution of market share. The
easiest way to find this using fundamentals is to follow the
company's profit margin. If a firm has no moat and competition is
forcing it to compete on price, margins will more than likely be in
decline. This could create an environment in which sales are
increasing but profits are shrinking. Luckily, this does not appear
to be the case for New Oriental Education and Technology. Gross
margins have remained in the 57% to 61% range for all of the last
10 years. By contrast, an eroding enterprise would have a much
wider range and likely be on the low end of the spectrum today.
The stock is down 14.1% on the year. Given the increasing pressure
on fund managers to perform after 2013's historic run, many are
trimming losers that have failed to keep pace with the indexes.
This is typically done at the end of a quarter so that the firm's
quarterly report does not include these holdings. This concept is
known as window dressing, and the chart below illustrates its
effect after first quarter 2014.
The 30 days following the quarter's conclusion saw a 17% decline in
the stock price before a value recovery began. I am expecting a
similar but smaller sell-off in the next few weeks that would
create an even better entry price for investors.
Buying at today's prices is in no way foolish. Those seeking a
multi-year hold to take advantage of continued growth will likely
fair well from a $26 long. Those demanding an even better value,
however, may wish to wait 30 to 45 days before pulling the trigger.
A balanced approach would be to buy 50% of ones normal position at
today's prices just in case the pullback does not occur. The other
half could be deployed below $23/share should that opportunity
present itself. If this does in fact occur, I would expect those
prices to be met in mid to late July. Institutions own 80% of the
158 million outstanding shares so a large seller or two could
easily apply the forecasted haircut by selling out of their long
As with anything in the stock market, this is simply a best guess
at what to expect in regard to institutional activity. The current
shift by many U.S. funds away from high P/E growth toward
low-multiple value could create favor for the underpriced equity
and lead to a bidding up of prices. This is the reasoning behind a
half-sized entry today to avoid missing the opportunity. But with a
long time horizon and an eye on intrinsic value, a few bucks one
way or the other shouldn't make a huge difference in total return
for this stock.
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