Investors are optimistic heading into the third-quarter earnings report from Chinese private tutoring provider TAL Education (NYSE:TAL). Following declines in mid-2019, the stock ended the year with a huge rally on brightening economic data and the prospect of an end to the trade war between the U.S. and China.
That surge sets up a potentially volatile week ahead as TAL announces its latest earnings results and updates investors on its outlook for the full year. So let's preview the report that's due out before the market opens on Tuesday, Jan. 21.
The winning streak
Investors found plenty of things to like about TAL Education's last earnings report. Back in late October, the company revealed a 34% revenue spike that significantly outpaced Wall Street targets.
Management predicted acceleration for the second half of the year, so look for better growth results on Tuesday. The key sales figure to watch beyond that broader increase is the education giant's enrollment pace. That metric is up 50% over the last six months, to 2.6 million. Growth accelerated in the second quarter, though, and investors are eager to learn whether that positive trend continued deeper into TAL Education's fiscal 2020. If it did, executives will likely credit their methodical expansion across China's landscape and spiking demand for online courses.
It's not unusual for a growth stock to prioritize market expansion over short-term profits. That's exactly what TAL Education is doing today by pouring its resources into bulking up its online offerings and adding classrooms in new cities. It entered 12 new locations in China last quarter, for example, and added dozens of new learning centers.
There are signs of financial strain on the business, though, and investors are expecting those to lessen over time. While its core tutoring business was solidly profitable and showed healthy pricing trends, TAL Education had to ramp up its marketing spending to achieve its higher growth rate. Selling and marketing expenses jumped 74%, in fact, to $263 million last quarter.
This week's results shouldn't be as dominated by expenses, though, and most investors who follow the stock are expecting to see the company return to overall profitability in Q3 with earnings of around $0.09 per share.
TAL Education routinely updates its short-term guidance for the full year, and that part of the report should attract plenty of investor attention on Tuesday. As it stands today, management is predicting 2020 sales will land somewhere between $826 million and $844 million, representing growth of between 41% and 44%.
That aggressive forecast depends on robust tutoring demand at its current classrooms and on TAL Education's ability to march into new markets across China. It also requires healthy economic growth. By following the executives' update outlook, investors can judge whether these trends are still supporting an accelerating growth profile for the private education services giant.