On Wednesday, JPMorgan analysts made a significant adjustment to their stance on New Oriental Education (NYSE:EDU), downgrading the stock from Overweight to Neutral.
This shift in rating comes with a substantial decrease in the price target, from $85.00 to $50.00, reflecting a more cautious outlook for the company's stock performance. According to InvestingPro data, the stock appears undervalued at current levels, with technical indicators suggesting oversold conditions.
The downgrade follows New Oriental Education's struggle with four consecutive quarters of missing guidance and subsequent estimate cuts. This pattern has eroded investor confidence, as noted by the analysts, who suggest that the market will likely require a period of consistent performance before trust in the stock can be restored. Consequently, JPMorgan has decided to step back from its previously optimistic rating.
Despite recent challenges, InvestingPro analysis reveals strong fundamentals with impressive gross margins of 52.91% and a healthy PEG ratio of 0.58, suggesting potential value at current levels. For deeper insights, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.
JPMorgan's analysts acknowledge the inherent strengths of New Oriental Education, such as its strong brand and superior faculty and curriculum, which position it as a high-quality compounder in China's tutoring market. Despite these advantages, and even with an expected profit growth of over 30% from fiscal years 2025 to 2027, the analysts express a reduced confidence in the company's earnings potential.
This has led to a more than 20% cut in forward earnings per share (EPS) projections and a more conservative price target, now set at roughly 15 times the target price-to-earnings (P/E) ratio, down from 20 times. InvestingPro data shows the company maintains strong financial health with an overall score of 2.94 (GOOD), supported by robust cash flows and solid profit metrics.
The decision to downgrade comes in the wake of a significant intraday correction for New Oriental Education's stock on January 21, 2025, which saw a drop of over 20%, contrasting with a gain in the broader market as indicated by KWEB's 1% increase. The analysts concede that their downgrade comes after the stock's substantial decline but maintain that it is a prudent move to avoid further disappointment.
They advise investors, unless they have a time horizon of one year or more, to hold off on re-engaging with the stock until there is a positive shift in consensus, which could potentially occur within the next quarter or two.
In other recent news, New Oriental Education & Technology Group Inc. experienced significant changes in analyst ratings and revenue forecasts. Goldman Sachs revised the company's stock target to $57, while maintaining a Buy rating, following weaker-than-expected revenue guidance for the February quarter. This was accompanied by a reduction in the forecast for fiscal year 2025 core revenue growth to at least 25% year-over-year.
Similarly, Macquarie downgraded the company's stock rating from Outperform to Underperform and slashed its price target, responding to a revised financial outlook. JPMorgan and Morgan Stanley (NYSE:MS) also downgraded New Oriental's stock rating to 'Neutral' and 'Equalweight' respectively, due to concerns over guidance misses and estimate reductions.
Despite these adjustments, the company's recent earnings reports showed a revenue rise of 19.4% year-over-year to $1.04 billion, slightly surpassing the expected $1.03 billion. However, it fell short of the consensus estimate of $0.32 with adjusted earnings per American depositary share of $0.22 for the fiscal second quarter.
BofA Securities and Jefferies also adjusted their financial outlook for New Oriental Education, reducing the stock's price target while maintaining a Buy rating. These recent developments underline the importance for investors to stay updated on future announcements from the company and its analysts.
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