What a Great Business to Be in

by Mitchell Clark, B. Comm.

Sometimes a business idea just makes sense. Sometimes you come across a story that galvanizes your attention to say: I wish I was in that business!

We’ve talked at length in this column about the opportunities being created in the world’s fastest growing large economy. Not only is China still growing, but there is also a real willingness on the part of business people and workers to expend significant effort to become successful. In addition to a strong work ethic, the Chinese are smart enough to know that they have to keep upgrading their skills in order to keep getting ahead. This is why the private education business is booming in China, and one of the most successful businesses I’ve ever come across is New Oriental Education & Technology Group, Inc. (NYSE/EDU).

I’ve written about this stock a number of times in this column over the last year and, basically, this company is a success because it’s teaching English to Chinese students. Lucky for us, English is the international language of business.

Founded in 1993, New Oriental Education sells all kinds of educational services targeting youngsters and adults with full primary and middle school education, as well as English language training and a variety of other courses for adults. The company also publishes a myriad of educational material, provides online courses of study, and operates a number of private schools throughout China.

In its latest financial quarter, the fiscal third quarter ended February 28, 2009, the company beat the Street on revenues and earnings, and provided new guidance that was above consensus.

According to New Oriental Education, its latest quarter saw revenues grow 36% to 65.4 million. Most of this growth was driven by an increase in the number of student enrollments in language training and test preparation courses. Total student enrollments in language training and test preparation grew 31% year-over-year to approximately 351,700.

Net income in the latest quarter declined just slightly to $10.4 million. The company finished the quarter with cash and cash equivalents of 224 million dollars.

For the nine months ended February 28, 2009, New Oriental’s total revenues grew a substantial 45% to 233.1 million dollars. Total student enrollments in language training and test preparation grew 23% from last year to 1,189,300.

Net income for the nine months ended February 28, 2009, was $58.4 million, representing a 24% increase over last year.

Looking ahead to its fourth fiscal quarter of this year, the company currently expects its total sales to grow around 30% from last year.

It’s earnings season now and when I see a great business that’s beating consensus estimates, I’ve got to write about it. To me, the business of test preparation and learning English is a growth industry in China with a lot of staying power. That country’s relentless appetite for growth and wealth isn’t going away anytime soon.