New Oriental Education: Strong Growth, Rising Profitability, And Attractive Valuation

Risk And Reward Moving Forward

The potential impact of the coronavirus is perhaps on the top investors' minds right now, but management considers that this is not much of an issue for New Oriental. Revenue from Wuhan is nearly 4% of the total, and the company already has plans to reschedule physical classes to the online format if it needs to do so in different cities.

It is practically impossible to tell for how long the coronavirus problems will last and what kind of economic effect they will have over the middle term. But New Oriental has the resources to successfully adapt to a changing landscape, and any kind of impact should be rather modest and only transitory.

More strict regulations in after-school training have benefited a well-established market leader such as New Oriental and, according to management, the company keeps getting market share from small players "almost every day".

This is a major positive for the company in the middle term, but it also shows that the competitive landscape is fluid, and changing regulations can always be a relevant source of uncertainty for investors.

Chinese students studying in the US have always been a major demand engine for New Oriental. Even if the company has widely diversified its offerings in recent years, visa restrictions and similar policies against immigration can be an important headwind.

In spite of these uncertainty drivers, the big-picture investment thesis in New Oriental looks clearly strong. The company is a market leader in an industry with abundant potential for growth in the years ahead. Revenue is growing vigorously and profit margins are expanding. At current prices, the stock even looks attractively priced. The risk and reward trade-off in New Oriental looks quite convenient over the long term.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EDU over the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my own ...

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