Based in Beijing, China, TAL Education Group (TAL) offers tutoring services to after-school K-12 students in China. Its shares have declined 40% year-to-date and 31.9% over the past month because of Chinese government’s efforts to curb the explosive growth of private tutoring services providers. In April, Beijing’s market regulator fined TAL, along with three other after-school tutoring institutions, for pricing violations.
TAL is currently trading 52.8% below its $90.96, 52-week high, which it hit on February 16.
Even though the company has been able to increase its total student enrollments year-over-year, its staggering losses and premium valuation could cause the stock to suffer further downside. In addition, since the regulatory pressure on the company is expected to continue building in the coming months, we think its future growth potential looks bleak.
Here is what we think could influence TAL’s performance in the near term:
Impact of Regulatory Crackdowns
China’s State Administration for Market Regulation has been intensifying its regulatory supervision of private education providers regarding violations of competition and pricing laws. The country’s desire to boost its declining birth rate by lowering family living costs, and to reduce the growing pressure on students has been the primary driver of restrictions on after-school tutoring. In fact, the antitrust watchdog has already imposed fines on TAL, GSX Techedu, Inc. and two other private tutoring services providers. Since the regulatory scrutiny is expected to intensify going forward, TAL’s stock could tank further.
Weak Financials
TAL’s net revenues came in at $1,362.7 million, representing a 58.9% improvement year-over-year in its fourth fiscal quarter, ended February 28, 2021. However, TAL generated a $216.9 million non-GAAP loss from operations, compared to a $8.4 million non-GAAP loss from operations in the same period of the prior year. Moreover, the company’s non-GAAP net loss came in at $88.7 million, compared to $57.2 million in the prior-year quarter. It reported a $0.14 non-GAAP loss per share over this period.
Its 0.5% asset turnover ratio is 47.1% lower than the 0.9% industry average. And its trailing-12-month levered free cash flow margin and EBIT margin are negative 18.2% and 7.4%, respectively.
Sky-High Valuation
In terms of forward P/E, TAL is currently trading at 69.33x, 292% higher than the 17.69X industry average. Its 126.44 forward EV/EBITDA multiple is 983.1% higher than the 11.67 industry average. Also, the company’s 5.83 trailing-12-month Price/Sales ratio is 262.3% higher than the 1.61 industry average.
POWR Ratings Reflect Bleak Prospects
TAL has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TAL has a D grade for Value and Momentum. The stock’s premium valuation and negative price returns year-to-date are reflected in these grades.
Also, it has an F grade for Growth, which is consistent with the weak growth prospects.
In addition to the grades we’ve highlighted, one can check out additional TAL ratings for Sentiment, Stability and Quality here.
TAL is ranked #62 of 69 stocks in the D-rated China group.
Click here to view the top-rated stocks in the China group.
Bottom Line
Analysts expect TAL’s EPS to decline 127.8% in the current quarter ending May 2021. With China framing strict rules to crackdown on the growing private tutoring business to reduce the burden on students and costs for parents, we think TAL’s stock could plunge further.
TAL shares were trading at $37.97 per share on Monday morning, down $4.96 (-11.55%). Year-to-date, TAL has declined -46.90%, versus a 12.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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