Elevator Pitch
My rating for New Oriental Education & Technology Group Inc. (NYSE:EDU) shares is a Buy. I previously looked at EDU’s financial prospects and shareholder capital return in my July 7, 2023 initiation piece.
This latest update offers a preview of New Oriental Education’s financial results for the final quarter of fiscal 2024 (YE May 31, 2024) that will be announced at the end of this month.
I expect EDU to register a Q4 FY 2024 results beat, considering factors like learning center growth, operating leverage, and livestreaming e-commerce business investments. The stock is trading at a Price-to-Earnings Growth or PEG of under 1 times, and above-expectations results might act as a catalyst for valuation re-rating. As such, I upgrade my rating for New Oriental Education from a Hold to a Buy.
The Market’s Expectations Of EDU’s Q4 Financial Performance
July 31, 2024 is the date for EDU’s Q4 FY 2024 results announcement. The sell side thinks that New Oriental Education would have performed well in the fourth quarter of the most recent fiscal year.
EDU’s top line is projected to grow by +32% YoY to $1.14 billion in Q4 FY 2024 as per the analysts’ consensus financial forecasts. The market also sees the company recording normalized earnings per share or EPS of $0.45 for the quarter ended May 31, 2024. This implies an expected acceleration in New Oriental Education’s bottom line growth from +13% YoY for Q3 FY 2024 to +21% YoY in Q4 FY 2024.
In the subsequent section, I share my thoughts on how New Oriental Education would have likely performed for the fourth quarter of fiscal 2024.
My Prediction Is A Fourth Quarter Results Beat
My opinion is that EDU’s upcoming Q4 FY 2024 financial results disclosure at the end of the current month will surprise the sell-side analysts in a positive way.
New Oriental Education could have established a greater-than-expected number of learning centers in Q4 FY 2024 and full-year FY 2024.
At the company’s earlier Q3 FY 2024 earnings briefing in April this year, EDU guided that “we plan to increase our (learning center) capacity by about 30% for this fiscal year” or FY 2024.
New Oriental Education revealed at its latest quarterly earnings call that “we’re taking market share” and indicated that “the demand from the customers is very strong.” As such, there is a reasonably good chance that the actual growth in the number of learning centers for New Oriental Education might surpass its own guidance.
Zheshang Securities, a securities broker based in China, issued a research commentary (not publicly available) with the title “Education Companies’ Learning Center Network Tracking” on June 2 this year. According to Zheshang Securities’ research analyzing EDU’s mobile app data, New Oriental Education’s number of learning centers could have increased by +34% YoY from 748 as of May 31, 2023 to more than 1,000 by the end of May this year.
Also, if EDU’s learning center network does expand to 1,000 or better, this will translate into a +10% QoQ increase in the company’s number of data centers for Q4 FY 2024. In contrast, the current consensus fourth quarter revenue estimate of $1.14 billion implies a -6% top line contraction on a sequential basis.
In other words, the probability of a Q4 FY 2024 revenue beat for EDU is reasonably high, as the company’s actual learning center network for the most recent quarter might have exceeded expectations.
On the other hand, New Oriental Education’s Q4 FY 2024 profitability is likely to benefit from positive operating leverage and the normalization of marketing spending for its livestreaming e-commerce business referred to as East Buy.
At its most recent third quarter results briefing, EDU stressed that it has the “operating leverage in hand” to support “the education business margin expansion” for the future. As an illustration of the positive operating leverage effects, New Oriental Education’s G&A (General & Administrative) costs increased by +34% YoY in Q3 FY 2024, which was much less than the +60% YoY surge in top line for the same time period.
Separately, there were elevated marketing costs relating to the company’s livestreaming e-commerce business East Buy, which are less likely to recur in the fourth quarter of fiscal 2024.
New Oriental Education’s S&M (selling & marketing) costs rose by +57% YoY for the third quarter of fiscal 2024. EDU attributed this significant increase in S&M expenses to “substantial investments in East Buy enhancing the development of its private label products” to “attract a larger customer base” in its Q3 FY 2024 results announcement. The company also stressed at its Q3 analyst call that “East Buy will bear fruit from this front (-loaded or upfront) investment and will generate more revenue and profit” given that “East Buy has further enlarged its customer base.”
My review of the company’s numbers and commentary suggests that EDU has spent a significant amount of monies on marketing its private label product portfolio for its livestreaming e-commerce business, East Buy, in Q3. New Oriental Education has already achieved some success in marketing its private label offerings and attracting more clients, based on the company’s third quarter briefing commentary. As such, EDU’s S&M costs for East Buy would likely have normalized and declined in Q4 FY 2024.
To sum things up, my bet is on New Oriental Education reporting better-than-expected Q4 results in end-July.
Variant View
The most significant near-term risk factor for EDU is a Q4 FY 2024 results miss.
A slower-than-expected expansion of New Oriental Education’s learning center network might translate into a top line miss for the company.
Also, if marketing costs for the livestreaming e-commerce business East Buy remain elevated, EDU’s upcoming profit margins and earnings could fall short of the market’s expectations.
Final Thoughts
New Oriental Education’s shares are undervalued based on the Price-to-Earnings Growth or PEG valuation metric, and I anticipate that a potential Q4 results beat could be a positive re-rating catalyst.
EDU’s PEG multiple is calculated to be 0.74 times (31/42) or way below the 1 times indicative of fair valuation, based on its FY 2024 P/E ratio of 31 times and its consensus FY 2024-2026 EPS CAGR forecast of +42% (source: S&P Capital IQ).
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