Could You Imagine a Better Business to Be in?

by Mitchell Clark, B. Comm.

A lot of companies saw their stock prices get walloped in November and March last year and most of those have yet to fully recover to pre credit-crunch levels. One company that has made a dramatic recovery on the stock market is a business with outstanding growth prospects over the long term. I’ve written about this company before and Street analysts are starting to raise their earnings guidance.

The company I’m referring to is New Oriental Education & Technology Group, Inc. (NYSE/EDU) and this stock is becoming an intuitional favorite once again. The great thing about this business is that it’s in the business of teaching English to Chinese students. Believe me, this is a huge growth market with staying power. The company also provides primary and middle school education, as well as English language training and a variety of other courses for adults, including test preparation for professional exams.

One thing I’ve noticed is that, in times of recession, education companies tend to experience much better results than other industries. DeVry, Inc. (NYSE/DV) is a good example of this. That business is seeing its enrollments go up. In tough times, people want to go back to school to upgrade their skills or, if they’ve lost a job, retrain for another.

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In its third fiscal quarter of 2009, ended February 28, New Oriental Education generated a 36% gain in top line revenues. Total student enrollments in language training and test preparation courses grew 31% year-over-year to approximately 351,700. This brought revenues up to 65.4 million dollars in the quarter, which was a bit lower than the company previously thought it could achieve due to the recession.

GAAP net income dropped a bit to 10.4 million dollars, down about 10% from income of 11.6 million dollars generated in the same quarter last year. Still, 10.0 million dollars in profits on 65.0 million dollar in sales is a very solid achievement for any business. The company finished the quarter with 224 million dollars in cash, 62.5 million dollars in term deposits, and without any debt.

Going forward, New Oriental expects its total revenues in its last fiscal quarter of this year to be between 50.5 and 53.5 million dollars, representing year-over-year growth of between 26% and 33%.

If you tried to think up a business to be in anywhere in the world, I couldn’t imagine a better idea than New Oriental Education. English is the international language of business and, because so much of China’s economy is export-related, business students are expected to have a working knowledge of the language.

This company is likely to flourish over the next several years, as more students enroll in school and more professionals upgrade their skills. The Street already owns this stock, but its recent trading action suggests that a new breakout is possible. This stock has already been an excellent moneymaker for stockholders and, like most other equities, it did get hammered in the recent market declines. What’s impressive about this stock is the fervor with which it has recovered since March. I don’t think I’d want to bet against this company over the coming quarters.