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Investing.com - Citi upgraded New Oriental Education (NYSE:EDU) from neutral to buy on Friday, while lowering its price target to $50.00 from $77.00. The education giant, currently valued at $8.91 billion, maintains an impressive "GREAT" financial health score according to InvestingPro analysis, with robust gross margins of 55%.
The upgrade comes as Citi sees "compelling upside" from the company’s domestic business mix-shift, which is expected to drive structural margin expansion. Citi projects that domestic K9 and Senior High segments will grow from 45% to 55% of revenue by fiscal year 2026. This growth trajectory aligns with the company’s strong revenue growth of 18.7% over the last twelve months, as reported by InvestingPro.
These domestic segments are expanding at 35% and 11% year-over-year respectively in FY26E with operating profit margins exceeding 20%, compared to approximately 15% for the company’s overseas business. Citi calculates that each 1% revenue shift from overseas to domestic operations adds 8-10 basis points to consolidated margins.
Despite favorable business transformation, Citi notes that EDU currently trades at approximately 17 times next-twelve-months price-to-earnings ratio. The firm’s sum-of-the-parts analysis applies segment-specific multiples to different business units, which combined with New Oriental’s $4.7 billion net cash position, provides "additional optionality for capital returns." InvestingPro analysis suggests the stock is currently undervalued, with multiple positive indicators including strong cash flows and impressive profit margins. For detailed valuation metrics and 12 additional ProTips, visit InvestingPro’s comprehensive research report.
Cost discipline measures, including rent reductions and headcount growth lagging revenue by 5-7 percentage points, are enhancing operating leverage for the education company. Citi also identifies an upcoming dividend plan as a "key near-term catalyst" for the stock. This operational efficiency is reflected in the company’s solid financial metrics, with a current ratio of 1.66 and strong cash flows that adequately cover interest payments.
In other recent news, New Oriental Education & Technology Group has been the focus of varying assessments by JPMorgan. The investment bank upgraded the company’s stock from Neutral to Overweight, raising its price target to HK$49.00, citing an attractive outlook for fiscal year 2026 and improved earnings visibility. This upgrade reflects a more positive stance, supported by expectations of a sustainable shareholder return policy and a forward price-to-earnings ratio of 13x. In contrast, JPMorgan also took a more cautious approach by lowering its price target from $50.00 to $48.00, maintaining a Neutral rating. This adjustment reflects concerns over potential conservative forward guidance and macroeconomic challenges impacting demand for overseas study programs. Despite the differing assessments, the valuation remains based on a 15 times forward price-to-earnings ratio. The analysts emphasize the need for an "expectation reset" to counter negative revisions. Additionally, they express a preference for TAL Education due to its perceived resilience to macroeconomic risks and potential for exceptional growth.
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