Let’s take a first look at TAL Education (XRS), a growth stock that’s doubled in the last year. TAL, which stands for Tomorrow Advancing Life, is an after-school tutoring company that provides services in China for kinds anywhere between kindergarden through 12th grade. Classes are administered thoouth a combination of small classes, 1-on-1 tutoring, and online courses. Through November TAL had 200 small class centers and 87 one-on-one centers throughout China, with around 40% of those in Beijing.
Kids in China face a more competitive landscape for education than they do in the states, as the college admission rate for a 4-year degree college is just 41% there compared to 64% here. It’s even harder to get into top universities, with only 9% of students gaining admission compared to 28% in the U.S. Even admissions to top high schools are extremely competitive.
TAL stock’s been good the last couple of years, but poor before that (check the Ten Year Chart link below to see more). Let’s take a closer look at the current situation in TAL’s one-year chart.
One Year Chart
Steady price climb all year, but there’s a couple things I don’t like in this picture. First is the P/E of 31. Yes, this is a 30% grower so a P/E of 31 isn’t bad, but sometimes Chinese education stocks — and Chinese stocks in general — let down investors and get smacked around. So there’s risk here, and the risk dictates a lower P/E should be offered before I get excited.
Also, Estimates look bad.One reason for this is the APEC conference is going on now, and there’s 7-days traffic control that is forcing TAL to close certain schools in Beijing during those 7-days. This is expected to negatively affect earnings. But even after that has passed profit growth isn’t expected to perk up until four quarters from now. So I don’t think this stock will be timely until 2015.
Fair Value
Normally by November I’m already looking forward to 2015 earnings estimates when figuring a P/E. But XRS has a March 31st fiscal year-end. So I’m not looking ahead to 2015’s fair value quite yet. For now TAL has a Fair Value of $31 and the stock was $32 when this data was compiled (October 23rd).
Sharek’s Take
I’m concerned with the risk Chinese education stocks hold, and this is from experience following other Chinese education stocks. So I don’t think I should pay Fair Value for XRS, I would like to get it at a discount. Also, profit growth is expected to average 5% the next three quarters, and although TAL has a nice history of beating the street, will the next beat be good enough to generate 20% profit growth? The good thing is this company is expected to grow profits a healthy 30% per year for the next three-to-five years, and that makes TAL Education a good stock to watch.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
