CONSUMER: Education Steadies New Oriental, TAL

Bottom line: Their latest results show private education companies like New Oriental and TAL could be steadier, more recession-proof bets as China’s economic slowdown accelerates, though neither is likely to produce astronomical growth rates.

Educators New Oriental, TAL post steady growth

Leading private educators New Oriental (NYSE: EDU) and TAL (NYSE: XRS) have just reported their latest quarterly results, which seems like a good time to review an overlooked sector that could be relatively recession-proof as China enters a major economic slowdown. Both companies are sending similar signals, basically that their business is growing steadily and is set to keep on a similar track through the end of the year. That may normally not look too exciting, but in these economically uncertain times such words of reassurance actually seem relatively positive.

New Oriental shares surged after its latest report last week, even though the company didn’t announce any major changes in recent trends. TAL shares actually fell 2 percent after it issued a similar report that showed strong growth going into the end of the year. But that said, it’s also worth noting that TAL shares trade at a price-to-earnings (PE) ratio of 40, or double the level for the slower-growing New Oriental. A third, much smaller company from the sector, recently listed private school operator Hailiang (Nasdaq: HLG), will issue its first financial results announcement later this week.

Education services is a relatively safe bet in China, a culture where people place strong emphasis on education and everyone is always looking for ways to give themselves and their children any advantage they can. Accordingly, the industry should be relatively recession-proof, since people will still want to boost their competitive advantage even when the economy slows.

We’ll begin with New Oriental, which has gone through a series of ups and downs since becoming China’s first education services firm to list nearly a decade ago. Its shares are up by about two-thirds over that period, though they’re also well off their previous post-IPO peaks. Still, that doesn’t look too bad as the firm seems to have finally found a relatively stable footing for longer-term growth.

Its latest results show solid but not overly exciting gains, with revenues, operating profit, net income and total enrollment all up in the 14-18 percent range. (company announcement) New Oriental, which offers mostly classes to supplement normal schools, also forecast revenue growth in a similar 13-17 range for the current quarter. None of those numbers look too exciting on the surface, but such steadiness could certainly appeal to many in these economically uncertain times in China.

Revenue-Profit Growth Gap Narrows

Next there’s TAL, whose faster revenue growth in the 40 percent range is probably the main factor behind its higher valuation. TAL reported 42 percent revenue growth to $173 million in its latest quarter, and profit actually more than doubled to $64 million. But in a more worrisome sign, the company’s operating profit grew at a far slower 28.5 percent, which may have helped to spark the sell-off for its shares after the results came out.

TAL said revenues will continue to grow in the 40-43 percent range in the current quarter, though investors will probably be watching closely to see what happens to its bottom line. The company posted a similar gap between its profit and revenue growth in its most recent fiscal year, though the gap appears to be narrowing in its latest report. Such gaps are usually the sign of heavy spending on promotions and expansion, which isn’t necessarily bad for a growing company. But it’s always good to see the gap narrowing.

The bigger message in all this really does seem to be that both New Oriental and TAL are entering a relatively stable period in their development, which probably reflects a certain maturing of the Chinese education market. That may not look too exciting for investors looking for income and revenue that double every year, which is what we saw for some China Internet stocks in the past. But in these more uncertain economic times, such stocks could provide a more stable alternative that’s less likely to fluctuate as China’s economic slowdown accelerates.

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