New Oriental Education & Tech Grp (ADR) (EDU) has achieved significant year-on-year margin improvement in the past two quarters, and the company is expects to sustain the improvement for the next two years while also maintaining top-line growth up to 22%, says Ella Ji, Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“The reason I like EDU is, first of all, the company has just started its so-called harvest mode, and as such, in the past two quarters the company has achieved a very significant year-on-year margin improvement. We expect this margin improvement story will sustain for the next two fiscal years, and on top of that, the company is able to maintain quite solid topline growth, between 18% and 22%,” Ji said.
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EDU offers an attractive risk/reward profile, as the company is currently trading at just 16 times their next year’s EPS estimate, Ji says. While the top-line growth has the potential to be slightly lower due to less learning center openings, Ji is confident the company’s EPS growth will accelerate.
“Let’s use the midpoint of 20% top-line growth; add a 2% annual margin expansion and your EPS growth is 22%. But in comparison, the company is trading at just 16 times our next year’s EPS estimate. So the PEG ratio is below one, and we think the stock at this level still offers quite an attractive risk/reward profile,” Ji said.
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