East Buy's Multi-Channel Strategy Will Broaden Consumer Reach And Strengthen Market Position

Key Takeaways

• Expansion into non-academic tutoring and intelligent learning systems signals strong new revenue streams and potential margin improvements.
  
• Diversified offerings and strategic initiatives, like East Buy and share repurchase, could drive robust growth and increased shareholder value.
  
• Economic uncertainties and increased operating costs challenge New Oriental's high-end education services, threatening future revenue and profit margins.

Catalysts

New Oriental Education & Technology Group Inc.

• Expansion of non-academic tutoring into 60 cities with nearly one million enrollments indicates significant growth in a new revenue stream and potential for increased net margins due to wide-scale reach and program diversity.
  
• Investment in intelligent learning systems to personalize student experiences is expected to drive efficiency, resulting in higher future revenues and possibly improved net margins compared to traditional methods.
  
• The tourism-related business lines diversifying offerings to new demographics have shown a 233% revenue increase, indicating potential for continued robust earnings growth in non-core segments.
  
• Multi-platform and multi-channel strategy for East Buy, including private label products and offline vending machines, broadens consumer reach and could lead to significant revenue growth and margin improvements.
  
• Expansion of the share repurchase program and dividend payouts signal strong cash flow positions that could lead to enhanced shareholder value and increase earnings per share over time.

New Oriental Education & Technology Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Oriental Education & Technology Group's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $668.5 million (and earnings per share of $4.35) by about January 2028, up from $391.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $886 million in earnings, and the most bearish expecting $546.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, down from 19.8x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.7x.
• Analysts expect the number of shares outstanding to decline by 2.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

New Oriental Education & Technology Group Future Earnings Per Share Growth

Risks

• The uncertainty of the macroeconomic situation negatively impacts the demand for New Oriental's high-end education businesses, such as overseas test preparation and one-on-one services, potentially affecting revenue growth and profitability.
  
• While the total revenue is growing, there has been a deceleration in the revenue growth rate due to a higher revenue base and unfavorable exchange rate impacts, which could limit future earnings growth.
  
• Increased competition in the market, particularly impacting new education business lines, could pressure revenue retention and market share.
  
• The overseas-related businesses face challenges as some parents reconsider sending their children abroad due to economic uncertainties, possibly affecting future revenue streams from these high-end services.
  
• The increase in operating costs and expenses, driven by capacity expansion and investments in new business initiatives, might impact profit margins and overall net income if not managed effectively.

Valuation

• The analysts have a consensus price target of $67.36 for New Oriental Education & Technology Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $109.5, and the most bearish reporting a price target of just $44.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.0 billion, earnings will come to $668.5 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 7.3%.
• Given the current share price of $47.48, the analyst's price target of $67.36 is 29.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.