One of Wall Street's biggest winners of the day is New Oriental Education & Technology, a staffing & employment services company whose shares have climbed 5.0% to a price of $53.9 -- 7.28% below its average analyst target price of $58.13.
The average analyst rating for the stock is buy. EDU may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 47.6% over the last year, returning -32.3%.
New Oriental Education & Technology Group Inc. engages in the provision of private educational services under the New Oriental brand in the People's Republic of China. The company is part of the real estate sector, which is mostly composed of REITs (Real Estate Investment Trusts). But there are a few real estate development and service companies included in the sector as well. While the value of REIT tracks the value of underlying investments in real property, the value of shares in real estate companies depends not only on the economic factors affecting the real estate market generally, but also investor perceptions regarding the future of the company.
New Oriental Education & Technology's trailing 12 month P/E ratio is 23.4, based on its trailing EPS of $2.3. The company has a forward P/E ratio of 13.9 according to its forward EPS of $4.32 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the real estate sector has an average P/E ratio of 27.31, and the average for the S&P 500 is 29.3.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From New Oriental Education & Technology's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,122,643 | 249,393 | 873,250 | 5.47 |
| 2022 | 971,008 | 143,045 | 827,963 | 157.85 |
| 2021 | -1,280,453 | 150,738 | -1,431,191 | -304.2 |
| 2020 | 1,130,085 | 429,197 | 700,888 | 41.62 |
| 2019 | 804,455 | 309,548 | 494,907 | -7.75 |
| 2018 | 805,648 | 269,140 | 536,508 |
- Average free cash flow: $333.72 Million
- Average free cash flown growth rate: 11.1 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, EDU is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
New Oriental Education & Technology's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2, so the company's assets may be overvalued compared to the average P/B ratio of the Real Estate sector, which stands at 1.94 as of the third quarter of 2024.
With a Very low P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend, we can conclude that New Oriental Education & Technology is probably undervalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and an above average PEG ratio.
