Stock to Watch and Investment Analysis (New Oriental Education and Technology)

EDU

Sector: services;

Industry: Education & Training Services

Business Model
EDU provides private educational services in China. Its business has 6 segments: language training; test preparation; primary and secondary school; educational content, software, and other technology development and distribution; online education; and other services and products. Test preparation generates 38% of the company's revenue.

Industry Analysis
The industry where EDU operates has huge potential. There are currently 600 million Chinese between 5 and 29 and it's the company's target market. The company's primary market is people between 10 and 19 and who live in cities, the population of which is estimated to be 140 million. A large portion of the market has been tapped yet.

Competitor Analysis
In mainland China, EDU has no real competitors. Its main competition includes regional niche companies that lack the reputation, capital and nationwide brand presence.

The company has a very strong brand that allows it to charge a hefty premium over smaller competitors.

Margin Growth
From 2004 to 2007, margin improves steadily with the exception of 2006. In 2004, its gross margin and net margin is 57% and 12% respectively. And in 2007, the margins increased to 60% and 22%.

However, margin varies a lot on a quarterly basis. Based on 2008 Q1 report, the margin in 2008 Q1 improves compared with the same quarter in 2007.

Top Line and Bottom Line
Over the last 4 years, revenue and net income are increasing steadily (again with the exception of 2006). Revenue and net income fluctuates significantly from quarter to quarter. Revenue will be higher normally in school holiday season (Q1).

Technical Analysis
The stock chart shows a clear upward trend. During the past 4 quarters, EDU exceeded expectation 3 out of 4 times. Most recently in the quarter of Aug 2007, the company beat analysts' earnings consensus and the stock price gapped up by $4.69.

Key Developments
November 26, 2007: EDU and Educational Testing Service (ETS) have reached an agreement making New Oriental the only language schools in China authorized by ETS to sell the TOEFL Practice Online (TPO) in their training classes. As part of the agreement, New Oriental has an exclusive right to provide TPO as a component of its language training or test preparation courses and may also sell the TPO to the general public through its bookstores. ETS will continue to sell the TPO on its website or through its subsidiaries or other third party resellers.

October 15, 2007: EDU Issued Q2 2008 Revenue Guidance In Line With Analysts' Estimates

Nov 27, 2007: New Oriental and Heinle ELT Partner to Develop Custom English-Language Learning Materials

Risk
When the company misses analysts' estimate consensus, the stock price will gapped significantly. This is what happed in July. The stock price tumbled $4.21.

Conclusion
EDU's fundamentals look strong and its earnings will continue to grow in 2008 as the company rapidly expands itself.