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.
Apollo Group (APOL) trades at one of the cheapest valuations in the for-profit education sector after starts declined, but the company is taking steps to improve and increase its student base, all while maintaining a healthy balance sheet, says Jeffrey M. Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp.
“For our contrarian investors, we’ve also been recommending Apollo Group, the largest company in the space with their flagship University of Phoenix. The call so far has not been a good one — we looked like a genius early on when trends started to move in the right direction, but they’ve taken a step back. To the company’s credit, they’re focusing on improving the quality of their student base as opposed to just bringing students in,” Silber said.
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Silber says APOL can appeal to deep value investors. The company’s financial metrics are currently solid, and the company is expanding its offerings to value-conscious students.
“So starts have been declining, though we believe we’ve seen the worst of the annual declines. They are also rolling out a low-priced option through their Western International University brand, which should help attract the price-conscious student. The stock is among the cheapest in the group on virtually every metric, and the company generates cash and has a solid balance sheet. A good pick for your deep value investors,” Silber said.
American Public Education (APEI) differentiates itself from other for-profit education providers through its low-cost tuition, appealing to a generation of students that scrutinizes the value proposition of education more than its predecessors, says Jeffrey M. Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp.
“American Public also has a differentiated strategy. They are the low-price provider in the space. If you go to their undergraduate school, which is where most of their students attend, they price their product at $250 per credit hour, and that’s in line with the tuition assistance levels from the United States military. Most other schools have their retail price, so to speak, and their military discount; this school offers their military discount to the masses,” Silber said.
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Silber says APEI has found a strategy that has allowed it stay ahead of the pack, proving an overall resilient name in the education space despite all the headwinds the space has faced in recent years.
“When students are really questioning the value proposition, if you can go for a lesser-cost school, that’s certainly a way to attract students, and that’s American Public‘s angle. So [that’s a stock] that we’ve really been recommending throughout the entire downdraft,” Silber said. “There have been some hiccups here and there, but [APEI has] definitely outperformed the rest of the group.”
PetSmart, Inc. (PETM) has closely aligned with the upscale customer by offering products and services that cannot be replicated at mass merchants or online retailers, positioning the company well for potential market volatility, says R.J. Hottovy, Global Director of Consumer Equity Research and Senior Restaurant and Retail Analyst at Morningstar.
“There are some names in the specialty categories, like PetSmart, that we like. Those are names that we still think are undervalued and think that they still represent something consumers are interested in spending money on. There is an inherent need for some of those products that should keep them somewhat protected from potential market volatility in the back half of the year,” Hottovy said.
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Hottovy points out that consumers are willing to spend money on pets even in tightening economic situations, and that PETM is offering products and services targeted toward the more upscale customer that cannot be replicated by mass merchants or online retailers.
“To their credit, they have also done a good job in merchandizing, and essentially I’d say all in all moving that product to someone more upscale. So they have more closely aligned themselves to that upscale consumer, but it is also something that consumers overall believe needs to be purchased. A lot of times it’s not a product that can be easily shipped, either, so there is not as much online competition. So I think that’s a very interesting name in terms of it’s protecting itself from mass merchants and online retailers of the world,” Hottovy said.
Grand Canyon Education (LOPE) differentiates itself from the competition with its physical campus, a competitive price point and by identifying as a Christian institution, being able to pull through headwinds in education and grow enrollments, says Jeffrey M. Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp.
“Grand Canyon is a real differentiated story. Yes, the majority of the students still attend online, but the company has gone back to the future and focused on their traditional campus. I hate to use the term ‘real school,’ but this is truly a ‘real school.’ When you go to the campus, you see large buildings — a student center, science labs, a big basketball arena, dormitories — and that has really helped them improve their impression to attract online students. People realize, ‘Hey, this is not just a website, this is a real school,’” Silber said.
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Silber says LOPE competes most notably with the University of Arizona and Arizona State University, recruiting students from within and without the state, and currently the company has the potential to expand its physical presence.
“This is one of the few companies that has actually been able to grow enrollments throughout this whole downturn. There are a number of cities outside of Phoenix that are trying to entice the company to open up satellite campuses there, so they could continue to grow for the foreseeable future,” Silber said.
Bank of America Corp (BAC) is among the financials that are rebounding from lows from the depths of the recession, and even as the money center bank has tripled in value, Rafael Resendes, Managing Director at Toreador Research And Trading, says he will remain fully invested in the stock.
“We continue to hold a very large position in Bank of America, as I mentioned. We haven’t reduced our position in that stock at all yet, even though it’s almost tripled. We still don’t see a reason to sell it, the value is still there, the company is still rationalizing its asset base and had not yet begun to demonstrate its earnings power. We think the next couple of years for that stock are very promising going forward,” Resendes said.
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Resendes says he started a position in BAC two years ago, taking advantage of the reduced valuation in financial companies’ stock after the sell-off.
“We saw firms such as Bank of America trading down around $5 a share at end of 2011, and essentially, we made financials the largest concentrated portion of our fund, not so much from the quantitative side, though it definitely showed up there, but on the opportunistic side. I think at the time Bank of America probably constituted about a 6% investment for our fund. Today, it’s now up to close to 16% through appreciation,” Resendes said.
Liberty Global Plc (LBTYA) is a European cable company with a long-term compounding story, as the company continues to buy back stock each year and has the ability to grow free cash flow per share at a mid-teens growth rate, says Jordon Laycob, Co-Manager at Marsico Capital.
“One of the stocks that we’ve owned for quite some time is Liberty Global. It’s a European cable company in Germany, the Netherlands, and recently made an acquisition in the U.K. of another company that we owned, Virgin Media,” Laycob said. “We like this company because the cable business in Europe is further back in the development of their marketplace relative to the U.S., and the cable companies have a significant advantage on speed and the broadband offering to consumers.”
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There is still room for LBTYA to take a significant amount of market share in Europe, as customers there are watching more television and have been more willing to pay for advanced features, Laycob says. This opportunity coupled with the company’s consistent share buybacks make LBTYA a solid stock in Laycob’s portfolio.
“This has been a really good long-term compounding story for us. Liberty Global buys back a significant amount of stock every year and can grow free cash flow per share at mid-teens growth rate. So that’s been a great stock for us,” Laycob said.
Amazon.com, Inc. (AMZN) continues to gain market share from traditional brick-and-mortar stores, and is a world-class provider of many product categories that appeal to low- to middle-income consumers looking to stretch their budgets, says R.J. Hottovy, Global Director of Consumer Equity Research and Senior Restaurant and Retail Analyst at Morningstar.
“Amazon is slightly undervalued. We think that they continue to be market share gainers from traditional bricks and mortar, and even though profitability is still a question mark there, we do think the company has a strong model and will have good operating margins over the next several years,” Hottovy said.
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Hottovy is seeing a massive channel shift in terms of where consumers are spending, and Amazon is an attractive retailer to those looking to stretch their household income, Hottovy says.
“Amazon‘s ability to be the world-class provider in many cases and in many product categories makes them an attractive player in this environment where you do have that lower- and middle- income consumer looking to stretch their household budget any way they can,” Hottovy said. “I think those are the kind of companies that consumers flock to in order to stretch their household budgets. So I think that those names become particularly interesting if we do start to see things continuing to get tighter for the average consumer.”
Microsoft Corporation (MSFT) remains exposed to areas of growth within technology despite the near-term, temporary decline in the PC market, with mobile, enterprise and gaming showing some growth prospects for this technology giant, says Rafael Resendes, Managing Director at Toreador Research And Trading.
“I think our third largest position in the fund at the moment is in Microsoft,” Resendes said. “We see everybody is focusing on the news that the PC market is shrinking, and certainly that’s true, but it tends to be concentrated in the area of the PC market that has been least profitable, the netbook space, which are essentially poorly designed products.”
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Resendes says the PC market will bounce back to stay roughly intact in the longer term, and MSFT‘s exposure to growing areas give the company opportunities and upside potential. He mentions the company’s Xbox, the cloud computing exposure and the enterprise as growing areas for the company.
“We are buying Microsoft for zero growth, and to the extent that they and Intel (INTC) are able to come up with a Windows Mobile platform or a form factor, which we think has a very high chance of happening this year or early next year, then all of a sudden we are looking at a position where, in addition to obtaining a nice dividend that’s well-covered, we have a stock that generates significant and attractive upside,” Resendes said.
Middlesex Water Company (MSEX) recently celebrated its 40th year of dividend increases, and has advantages in being a large enough company to be publicly traded and have access to the capital markets, yet small enough to be able to respond quickly to the needs of customers, says Dennis W. Doll, President, CEO and Chairman of Middlesex Water Company.
“Our size is probably one of our strongest advantages. We are just large enough that we are publicly traded. We have ready access to the capital markets. Yet, we’re small enough that we can make decisions quickly, we can respond to the needs of both existing and potential customers quickly,” Doll said. “I know it can be more difficult sometimes to get that kind of assistance that quickly with a larger company.”
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MSEX has also engaged in opportunities around the country through strategic partnerships with larger entities, Doll says. Additionally, Doll believes the company is stable and sustainable, as evidenced by MSEX‘s 40 years of dividend increases.
“We have entered into a number of strategic partnerships with entities much larger than we are in various proposals that we have in various places around the country, and we wouldn’t have those opportunities if we didn’t have these partners,” Doll said. “We are certainly a stable company. We have been in business 115 years. We just celebrated our 40th year of dividend increases. …We have all of the skills and all the capabilities to not only sustain the operations we have now, but we also have a good opportunity and plan for the next generation.”
