It's a big name for a company: New Oriental Education and Technology Group (NYSE: EDU). But the company is in a big market -- it's a private education provider in China. And with its strong business model and track record, the company is selling at a frothy valuation.
In the fiscal second quarter, revenues increased 32.9% to $21.6 million. Net income was $1 million or $0.03 per share, which compares to a loss of 8.2 million RMB (the company did not convert this into U.S. dollars, although it's just over $1 million at current exchange rates).
Historically, the fiscal second quarter is the weakest in terms of student enrollment. Yet in the current quarter, there was still a nice 20.3% increase in enrollment to about 217,500.
Background
Since 1993, New Oriental has built a strong infrastructure, with physical classrooms as well as online training and CD-ROMs. The curriculum includes test preparation (for law and med school, for example) and practical English.
Because of the growth opportunities, New Oriental has been aggressive with its marketing and capital expenditures (like building new schools). But the company still generates strong cash flows (about $5.4 million in the fiscal second quarter) and has about $148.8 million in the bank (a chunk came from its recent IPO).
The company has also been smart with alliances. For example, it has content-licensing agreements with McGraw-Hill (NYSE: MHP) and Thomson (NYSE: TOC).
What's more, the New Oriental brand can also be leveraged into new categories. For example, the company is moving into the professional certification training market, providing training for exams like the PRC bar, a certified public accountant (CPA) designation, and civil service positions.
In conclusion...
Going forward, New Oriental forecasts its fiscal third-quarter revenues at $25.8 million to $27.1 million, which represents annual growth rates of 19.8% to 25.8%, respectively.
However, the company sports a lofty valuation of $883.25 million. That is, the company is selling at 7 times revenues. True, this isn't unusual for IPOs, as seen with the valuations of DivX (Nasdaq: DIVX) and Riverbed Technology (Nasdaq: RVBD). But it also means lots of volatility. Besides, New Oriental's lock-up period will expire March 5, allowing the company's insiders and employees to sell their holdings. Thus, in light of the high valuation, there will certainly be lots of temptation for them to lighten up on their holdings, putting pressure on the stock price.
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in CAPS.
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