– By GF Value
The stock of TAL Education Group (NYSE:TAL, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $56.2 per share and the market cap of $33.7 billion, TAL Education Group stock shows every sign of being modestly undervalued. GF Value for TAL Education Group is shown in the chart below.
Because TAL Education Group is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 44% over the past three years and is estimated to grow 36.10% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. TAL Education Group has a cash-to-debt ratio of 2.79, which which ranks in the middle range of the companies in Education industry. The overall financial strength of TAL Education Group is 6 out of 10, which indicates that the financial strength of TAL Education Group is fair. This is the debt and cash of TAL Education Group over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. TAL Education Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $4 billion and loss of $0.07 a share. Its operating margin is -2.94%, which ranks worse than 72% of the companies in Education industry. Overall, the profitability of TAL Education Group is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of TAL Education Group over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of TAL Education Group is 44%, which ranks better than 95% of the companies in Education industry. The 3-year average EBITDA growth rate is -28%, which ranks worse than 86% of the companies in Education industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, TAL Education Group’s ROIC is 14.75 while its WACC came in at 3.73. The historical ROIC vs WACC comparison of TAL Education Group is shown below:
In conclusion, the stock of TAL Education Group (NYSE:TAL, 30-year Financials) is estimated to be modestly undervalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks worse than 86% of the companies in Education industry. To learn more about TAL Education Group stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.