Why New Oriental Education & Tech Grp Stock Dropped

Is New Oriental Education's stock move today meaningful? Or just another movement?

Jul 22, 2014 at 2:30PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of New Oriental Education & Tech Grp (NYSE:EDU) were getting sent to the principal's office Tuesday after the Chinese tutoring company provided poor guidance in its fourth-quarter report.

So what: New Oriental, which offers test prep, language assistance, and other private courses in China, actually beat expectations in the past quarter. Revenue improved 20% to $287.5 million, ahead of estimates at $281.6 million, and adjusted EPS grew from $0.22 to $0.30, topping the consensus at $0.28. Student enrollment improved 4% to 581,000. Revenue guidance for the current quarter, however, disappointed as management sees sales growing just 6%-10% to $412 million-$427.5 million, much lower than Wall Street's expectation of $463.4 million in revenue for the quarter.

Now what: The company explained that the slower revenue growth was due to "margin expansion initiatives, the transition to a new POP Kids program" (which teaches kids English), and a change in product mix. It also said it would open fewer learning centers than expected because of the slowdown in revenue growth. Previously, it had expected to open 10 to 12 learning centers each quarter. A number of factors affected the reduced guidance, such as a decline in adult English learners, increasing competition, and slower growth in the Chinese economy, and many of them seem difficult for the company to overcome. It's unclear what New Oriental's plans to grow margins are, but significantly slower sales growth seems like a warning sign. The company did not give full-year guidance, but these causes look like lasting problems. Consequently, I'd expect future growth to slow as well. 

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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