The recent stock market performance of New Oriental Education & Technology Group Inc (EDU, Financial) has shown a notable daily loss of -9.35%, although the past three months have witnessed a gain of 25.61%. With an Earnings Per Share (EPS) of 1.7, investors are questioning whether the stock is significantly overvalued. This analysis aims to delve into the valuation of EDU to uncover its true market position.
Company Introduction
New Oriental Education & Technology Group Inc (EDU, Financial) is a prominent private education provider in China. Following a regulatory crackdown in 2021, the company has shifted its focus from K-9 academic after-school tutoring, which previously contributed to a substantial portion of its revenues, to new initiatives such as nonacademic tutoring and intelligent learning systems. The company also maintains a strong presence in high school academic after-school tutoring and overseas-related test preparation and consulting services. New Oriental Education & Technology Group owns a 55.7% stake in East Buy (HKG: 01797), a leader in livestreaming e-commerce. When comparing the stock's current price of $72.02 to the GF Value of $50.59, it is crucial to assess whether the current market valuation is justified.
Summarizing the GF Value
The GF Value is a unique measure of a stock's intrinsic value, incorporating historical trading multiples, an adjustment factor based on past performance, and future business performance estimates. According to this valuation method, New Oriental Education & Technology Group appears to be significantly overvalued. With a market cap of $12.10 billion, the stock's price is well above the suggested fair value. This discrepancy suggests that the stock may offer poor future returns compared to its projected business growth.
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Assessing Financial Strength
One of the key considerations for investors is the financial strength of a company, as it can be indicative of the risk of permanent capital loss. New Oriental Education & Technology Group boasts a cash-to-debt ratio of 8.77, placing it ahead of 73.75% of its peers in the Education industry. This strong balance sheet earns the company a financial strength rating of 8 out of 10 from GuruFocus.
Evaluating Profitability and Growth
Profitable companies, especially those with a history of consistent profitability, pose less risk to investors. New Oriental Education & Technology Group has been profitable for 9 out of the past 10 years, with a revenue of $3.40 billion and an Earnings Per Share (EPS) of $1.7 over the last twelve months. The company's operating margin of 9.46% ranks in the upper half of the Education industry. However, the company's growth has been less impressive, with a 3-year average annual revenue decline of 7.4%, ranking lower than 78.15% of industry counterparts.
ROIC vs WACC: A Profitability Indicator
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) can reveal its value-creating potential. New Oriental Education & Technology Group's ROIC over the past 12 months stands at 7.87, surpassing its WACC of 5.32, indicating that the company is generating value for its shareholders.
Conclusion
Overall, New Oriental Education & Technology Group (EDU, Financial) is currently priced above its intrinsic value, suggesting that it is significantly overvalued. Despite this, the company has a strong financial foundation and fair profitability. However, its growth rate is not as competitive within the Education industry. To gain a deeper understanding of New Oriental Education & Technology Group's financials, interested parties can explore the 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.
