This Chinese educational company is a buy on recent pullbacks, and just received a ‘Buy’ rating from Brean Capital.
TAL Education (XRS)
From Cabot Stock of the Week
China has recently announced the end of its one-child policy, but it will be years before a wave of second children begins to enter the education system. In the meantime, the children of the old policy will continue to be the focus of six adults—four grandparents and two parents—who, since there are very few pension plans in China, see that one child as the sole support of its elders in their retirement years. That’s a lot of pressure, but it also means that there are lots of resources to pay for that one child’s education and training, including private tutoring.
TAL Education (XRS) is one of the biggest private education businesses in China, offering a variety of teaching approaches for students from pre-school through high school. Concentrating on the core education topics of math, English, Chinese, physics, chemistry and biology, the company offers three formats for learning—small classes, personalized tutoring or online courses.
The company started with one learning center in Beijing in 2003 and has now expanded to 19 cities and 300 learning centers. TAL has campuses in cities in both north and south; Beijing has the highest number (122 learning centers), followed by Shanghai (36), Guangzhou (19) and Tianjin (16). The company has grown both organically, by opening additional centers on its own, and by acquisition: TAL acquired Firstleap Education and its 60 learning centers in September 2015.
TAL Education has always enjoyed excellent financial health. Revenue growth in recent years has increased from an annual rate of 27% in 2013 to 39% in 2014, 38% in 2015 and 43% in 2016 (the company’s fiscal year ends in February, so it’s now fiscal 2017). After-tax profit margins have been consistently around 11% for the past three quarters.
The chart for XRS shows considerable long-term strength. The current rally began with the stock’s rebound from the August 2015 market meltdown, which pulled XRS as low as 26. A remarkable run from 30 in late September 2015 to 49 in mid-December gave way to the market’s December/January correction, which gave way, in turn, to a choppy rally with lots of pullbacks. But each correction was followed by a surge higher as investors recognized the long-term strength of TAL Education.
The company reported quarterly earnings on July 26, and the results fell short of analysts’ forecasts by six cents per share (earnings were 25 cents per share vs. estimates of 31 cents), although revenue ($195 million) came in well ahead of the expected $185 million. Missing analysts’ targets is usually considered a chance for the market to take a stock down a peg or two, and XRS has fallen from its pre-earnings high of 66 to below 59, which is not only just above the stock’s uptrending 50-day moving average but also right at the 58 resistance level that turned the stock back in April and May.
I see this pullback as a buying opportunity. The TAL Education story is a strong one, and investors are likely to return to the stock quickly. In fact, one analyst—Brean Capital—just initiated coverage on the stock with a buy rating on July 29. We expect the stock to find support quickly and build a new base before it gets moving. But the bargain buy point is now. BUY.
Timothy Lutts, Cabot Stock of the Week, www.cabot.net, 978-745- 5532, August 2, 2016