Friday, June 13, 2008

Bookkeeping: Closing New Oriental Education (EDU)

I am taking today's 6% rise in shares of New Oriental Education (EDU) as an opportunity to close out the remaining shares of this stock (0.5% stake) @ $66. We've had some ups and downs, in this very volatile name (see chart), but all in all, are leaving with a $3500 loss. This was one of our original positions started in early August.

When last we visited the name in late May, the stock was tanking for no apparent obvious reason. After the fact we came to find out analysts were raising concerns about disruptions to operations from the Chinese earthquake.
  • A number of analysts said Friday they expect the Beijing Olympics to disrupt operations for New Oriental Education & Technology Group, a Beijing-based provider of private educational services in China.
  • Looking at New Oriental, PiperJaffray analyst Mark A. Marostica, who rates the stock "Buy," expects the Olympics to somewhat disrupt its Beijing test prep business for out-of-area students because the Chinese government forbids students to stay in dorms past July 9 for security reasons.
  • Overall, Marostica said the impact should be modest because New Oriental's Beijing locations will stay open during the Olympics, and parents are likely to keep kids enrolled in English classes, given the importance of learning the language.
  • Meanwhile, Citi Investment Research analyst Catherine Leung expects the Sichuan earthquake to have a greater-than-expected impact, along with the Olympics, specifically because of class schedules in Beijing, school openings and dorm facilities.
  • "Student enrollments across the country have softened noticeably since the quakes, especially during the mourning period, as many students and the broader community have focused their time and resources on quake relief efforts," Leung wrote in a client note.
  • Leung said the earthquakes haven't significantly affected profit and sales in the fiscal fourth quarter, which ends in May, but expects the effect to show up in first-quarter revenue, as some students deferred enrollment.
The company gave its side of the story a few days later (note to Trina Solar - see, it is not a bad thing when a company communicates openly with its shareholders instead of surprising them every quarter - yes I'm bitter)
  • China is currently dealing with its largest natural disaster in a generation, and the entire nation is mobilized in response to the earthquake in Sichuan and in preparation for the Beijing Olympics in August. New Oriental has received an unusually large number of inquiries from investors and analysts regarding the impact of these two events on the Company's business. These events have created a number of short-term challenges, but the Company remains confident in the long-term success of the business.
  • New Oriental has twelve schools and learning centers in Sichuan province - six in Chengdu and six in Chongqing - which account for slightly less than three percent of the Company's revenues. The schools suffered minor damage and are expected to reopen next month
  • With the nation's attention focused on the disaster in Sichuan, quake relief has taken priority over personal endeavors such as test preparation and studying. New Oriental, in the two weeks after the earthquake, has seen a noticeable nationwide decrease in the number of students enrolling in new classes compared to the Company's own internal estimates, a trend which was especially pronounced during the three days of official mourning from May 19 to 21, 2008. New Oriental is hopeful that the trend will reverse itself, and expects enrollments to recover in June as preliminary relief efforts are completed and the nation returns to a more normal state.
  • The Company noted that there would be no material adverse financial impact from the Sichuan earthquake for the fourth quarter ended May 31, 2008. While the earthquake may affect enrollments in the coming months, the Company does not expect any long-term negative impact on its business as a result of the earthquake.
  • The Beijing Olympic Games are scheduled to take place for two weeks from August 8 to 22, 2008. In an effort to reduce traffic congestion and pollution, the Beijing government will institute certain transportation restrictions starting in early July. During the Olympic Games, many roads in and around Olympic venues will have restricted access or will be closed to the public, making it less convenient for New Oriental students to attend classes.
  • Additionally, college and university students in Beijing must vacate their dorms from July 9, 2008 until the end of summer as a security measure. Normally, students from both Beijing and outside of Beijing attend New Oriental summer programs during this period. The Company has begun marketing to students located outside of Beijing to encourage them to attend New Oriental programs in other Chinese cities such as Shanghai, Tianjin and Zhengzhou. The Company plans to increase capacities in those cities during the summer months. Beijing accounts for approximately 35 percent of New Oriental's revenue, and the summer quarter accounts for approximately 40 percent of annual revenues.
So first let me say, THANK YOU and I APPRECIATE IT when a company is open like this and addresses shareholders concerns... a few others could take note of this, especially if for example your name rhymed with Prina Molar. (did I mention I'm bitter?) With that said, I believe there is no change to the long term story here but risks in the near term story; it looks like the current quarter will be intact but the following quarter could see some revisions downward. I probably have more concern about the slowdown in Beijing (Olympics) than the earthquake situation. Not only is 1/3rd of their business in Beijing but 40% of their revenue comes in the summer. So it's not worth the risk for now. If EDU was a low PE stock that would be one thing but this is a very pricey stock and knowing how Americans panic like scalded chimps (thanks Macke) at even a hint of slowdown, this raises risks to our holdings. They won't care if its a 1 quarter or 2 quarter issue - that is as far out as most American investors ever look. That is the "long term" for this generation. So they panic, and cry, and whimper and most importantly - SELL and ask questions later (if ever). And at 54x forward earnings I am not going to have a good defense - this sort of valuation requires perfect execution and no excuses. Even valid ones.

So with the stock approaching a key resistance area I am going to take my ball and go home. We'll revisit this name in a quarter or two (in the current investing world that is referred to as "super long term") For now, this helps reduce risk, raise a small bit of cash, and keep our fund focused - as I've been hinting I have some "alternative energy" (non solar) I'd like to add to the portfolio if they'd ever pullback... so we'll have open slots for those.

Long Trina Solar in fund and personal account

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