TAL - TAL Education: Eyes On Recent Share Price Volatility

Summary

• TAL Education's share price more than doubled between mid-November and late-December 2022, as the market became more optimistic about China's prospects.
• But TAL's shares have pulled back significantly in the past two months, as investors took a negative view of new education regulations and its Q3 FY 2023 net loss.
• My rating for TAL Education is a Hold; TAL's recent stock price performance has already priced in both the positive and negative developments for the company to a large extent.

Elevator Pitch

I have a Hold rating assigned to TAL Education's ( TAL ) stock.

TAL's business transformation is still a work-in-progress as evidenced by its below-expectations earnings for the most recent quarter. After its shares experienced significant volatility in the past couple of months, the market now values TAL Education at a forward FY 2025 P/E of 31.2 times. Considering that TAL Education requires more time to execute on new business opportunities and its valuations aren't exactly cheap, a Hold rating for TAL Education is warranted.

Recent Share Price Performance For TAL Education

I discussed TAL's growth opportunities and regulatory risks in my prior article for the company published on November 14, 2022.

TAL Education's stock price rose by +117% from $4.82 at market open on November 14, 2022 to a 52-week high of $10.45 during intraday trading on December 22, 2022. But TAL's last done share price of $7.18 as of February 17, represents a -31% correction from its one-year stock price peak.

In the subsequent sections of this article, I highlight the key events that have affected TAL's share price performance in the past three months or so.

TAL Initially Benefited From Improved Sentiment On China

The initial +117% surge in TAL Education's shares between mid-November and late-December last year was largely attributable to a favorable shift in investor sentiment relating to China.

Seeking Alpha News reported on December 7, 2022 that China was "loosening its severe COVID measures." China's actions sent a clear message to the market that the country was serious about pivoting away from its strict COVID-zero policy. The country's COVID-zero stance had a negative impact on the Chinese economy and domestic businesses, so investor confidence in China's economic recovery grew following the relaxation of pandemic restrictions.

In mid-December 2022, the delisting risk for US-listed Chinese companies was perceived to have been reduced significantly. A December 15, 2022 Seeking Alpha News article highlighted that "U.S. regulators" obtained "complete access to Chinese auditors' books." Notably, TAL Education's shares are solely listed on the New York Stock Exchange, so delisting has a more substantial negative impact on the company as compared to some of its US-listed Chinese peers which have secondary or dual listings.

Nevertheless, TAL Education's positive share price momentum wasn't sustained, as outlined in the next section.

But A Bottom Line Miss And Negative Policy Developments Led To Stock Price Correction

Since late-December 2022, TAL's stock price has pulled back by approximately -31% due to both industry-specific and company-specific factors.

Seeking Alpha News published an article at the end of last year, noting that China's "Ministry of Education published new guidelines for the tutoring industry." Earlier, investors were hoping that the regulatory crackdown for the Chinese education industry had already concluded, but recent regulatory developments suggest that this isn't the case. With China eager to tackle the issue of a low birth rate, it is inevitable that policymakers will keep a close watch on China's education sector which will limit the future growth and profitability of Chinese education companies in general.

Separately, TAL Education's most recent Q3 FY 2023 (YE February 28) financial results released in January fell short of the market's expectations. TAL reversed from a positive non-GAAP net income of $27 million in Q2 FY 2023 to incur an adjusted net loss of -$23 million for Q3 FY 2023. In comparison, the sell-side analysts' consensus Q3 FY 2023 non-GAAP adjusted bottom line was a positive $8 million net profit prior to its recent quarterly results release as per S&P Capital IQ data. At its Q3 FY 2023 investor briefing , TAL acknowledged that "investment into new initiatives" hurt the company's bottom line performance.

Medium Term Outlook And Valuations

TAL's intermediate term financial outlook isn't very encouraging.

According to consensus financial projections taken from S&P Capital IQ , TAL Education is still expected to suffer from a normalized net loss of -$60 million for full-year fiscal 2023. The sell-side analysts estimate that TAL Education can turn profitable and generate normalized net income of $72 million and $139 million for FY 2024 and FY 2025, respectively. But these consensus bottom line forecasts are still way below the $445 million and $246 million of normalized net earnings that the company delivered for FY 2019 and FY 2018, respectively prior to COVID-19 and the regulatory crackdown on the Chinese education industry.

With my earlier mid-November 2022 write-up, I mentioned TAL Education's new growth areas, including "content solutions and learning technology solutions", and its "live streaming e-Commerce business." While these new businesses have good growth potential, it will take TAL Education more time to build new revenue streams that can completely make up for the loss of its legacy K-9 education business.

TAL Education currently trades at 31.2 times consensus forward fiscal 2025 normalized P/E as per S&P Capital IQ's valuation data, after its share price rose by +49% since November 14, 2022. TAL's current valuations appear to be fair, taking into account both the positives relating to China's reopening and the negatives associated with the company's mid-term business outlook.

Closing Thoughts

I keep my Hold rating for TAL unchanged. I have a favorable opinion of TAL Education's new growth opportunities, but it will take time for the company to be as profitable as it was in the past. TAL Education's forward FY 2025 P/E of above 30 times also doesn't imply much upside at current valuation levels. As such, I have decided to maintain a Hold rating for TAL Education.

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