Wall Street thinks New Oriental failed last quarter, but should it be grading on the curve?

What happened

Chinese education company New Oriental Education & Technology Group (NYSE:EDU) saw its stock chopped by 8.9% in Tuesday trading, after reporting fiscal Q2 2018 earnings  results.

New Oriental exceeded expectations for Q2 revenue, booking $467.2 million when analysts had been looking for only $456 million. However, New Oriental earned only $0.09 per share pro forma and just $0.03 per share in GAAP terms in Q2. By either measure, these numbers fell short of the $0.11 per share Wall Street  had hoped it would earn.

Chinese schoolkids writing in notebooks on desks

Image source: Getty Images.

So what

Relative to last year's Q2 performance, it was another case of good news, bad news. On one hand, sales grew 37% year over year. On the other hand, net profit declined 57% year over year.

On the third hand, though, focusing too much on just one quarter's results may be a mistake -- especially in Q2, which New Oriental CFO Stephen Zhihui Yang reminded investors "is traditionally the slowest quarter in the year" for New Oriental. Meanwhile, for the first half of this year, New Oriental's sales were up nearly as much as for Q2 alone -- 29% year over year. More importantly, the profit New Oriental earned on those sales increased 7% to $1.03 per American depositary share.

Despite falling in Q2, earnings were both positive and growing for the first half as a whole. Not growing as fast as sales, granted, but at least heading in the right direction.

Now what

As for where New Oriental will be heading the rest of this year, Yang told investors that "margin pressure will gradually lessen over the coming quarters" and added: "More importantly, we will increasingly benefit from economies of scale." In Q3, management is forecasting sales to grow 35% to 38% -- in line with Q2 growth and faster than seen in H1 as a whole -- to between $591.1 million and $604.2 million.

Management didn't give guidance for Q3 earnings, but on Wall Street, analysts are looking for the company to produce $0.59 per share, presumably pro forma.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group. The Motley Fool has a disclosure policy.