Today, New Oriental Education & Technology Group Inc (EDU, Financial) experienced a daily loss of 4.25%, contributing to a 3-month decline of 7.8%. With an Earnings Per Share (EPS) of 1.9, investors are prompted to question: Is the stock significantly overvalued? This analysis delves into the valuation of EDU to provide a clearer picture.
Company Overview
New Oriental Education & Technology Group Inc (EDU, Financial), a leading private education provider in China, has undergone significant changes following the regulatory crackdown in 2021. Previously, K-9 academic after-school tutoring constituted 50%-60% of its revenue. Post-regulation, the company shifted focus towards nonacademic tutoring, intelligent learning systems, and devices, while maintaining its high school and overseas-related test preparation and consulting business. New Oriental also owns 55% of East Buy, a top player in livestreaming e-commerce. Currently, the stock trades at $83.53, with a market cap of $14.20 billion, juxtaposed against a GF Value of $60.76, suggesting a potential overvaluation.
Understanding GF Value
The GF Value is an exclusive metric that estimates the intrinsic value of a stock based on historical trading multiples, a GuruFocus adjustment factor, and future business performance forecasts. When the stock price significantly exceeds the GF Value line, it indicates an overvaluation, suggesting that the stock's future returns might be below its business growth potential. Conversely, a price below the GF Value could indicate undervaluation, promising higher future returns. For New Oriental Education & Technology Group, the current price significantly exceeds the GF Value, highlighting its overvalued status.
Financial Strength and Stability
Assessing the financial strength of a company is crucial to mitigate the risk of capital loss. New Oriental Education & Technology Group boasts a strong financial position with a cash-to-debt ratio of 8.1, ranking better than 72.9% of peers in the education sector. This robust financial health, scored 8 out of 10, supports the company's capacity to sustain its operations and growth without undue leverage.
Profitability and Growth Perspectives
The profitability of New Oriental Education & Technology Group, with an operating margin of 9.61%, is fairly strong, reflecting its efficient operational management. However, the company's growth metrics present concerns. The 3-year average revenue and EBITDA growth rates are lower than the majority of its industry counterparts, indicating potential challenges in scaling the business amidst a competitive and regulatory challenging environment.
Moreover, the company's Return on Invested Capital (ROIC) of 8.24 surpasses its Weighted Average Cost of Capital (WACC) of 6.1, suggesting that it is generating value above its cost of capital, a positive indicator for potential investors.
Conclusion
While New Oriental Education & Technology Group (EDU, Financial) showcases strong financial health and fair profitability, its current market price significantly above its GF Value suggests it is overvalued. Potential investors should be cautious, considering the stock's price premium and growth challenges. For more detailed financial insights, explore the company's 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
