TAL - TAL Education: What To Watch With Upcoming First Quarter Results

2023-07-20 08:25:03 ET

Summary

• I see TAL delivering in-line Q1 FY 2024 results, so its results announcement next week should be a non-event in terms of potential catalysts for the stock.
• The key things to watch when previewing TAL's first quarter results are third-party product sales estimates, historical cost trends, and management commentary.
• I leave my Hold rating for TAL Education stock unchanged, as positive surprises are unlikely to emerge from TAL's Q1 earnings announcement on July 27.

Elevator Pitch

My investment rating for TAL Education Group ( TAL ) stock is a Hold.

In my prior article for TAL written on May 8, 2023, I highlighted that TAL Education's shares were inexpensive due to concerns about the company's financial outlook. With the current write-up, I do a preview of TAL Education's results for the first quarter of fiscal 2024 (YE February).

My preview of TAL's results indicates that the company is likely going to register wider losses for Q1 FY 2024 in line with the market's expectations. This implies that the upcoming first quarter results release won't be a positive catalyst for TAL Education, even though its shares' valuations are appealing. As such, I see no reasons to change my existing Hold rating for TAL.

The Date Of TAL's Q1 FY 2024 Earnings Announcement

TAL Education disclosed that the company's Q1 FY 2024 financial performance will be revealed next week on July 27 in the morning before trading hours, as per an earlier media release published in the earlier part of this month.

In the subsequent section, I outline the market's expectations regarding TAL's financial results for the first quarter of the new fiscal year.

Analysts' Expectations Of TAL Education's First Quarter Performance

The sell-side sees TAL achieving positive top line growth at the expense of wider losses in Q1 FY 2024.

As per consensus financial estimates sourced from S&P Capital IQ , the market expects TAL Education's revenue to increase by +20.1% YoY from $224.1 million in Q1 FY 2023 to $269.1 million for Q1 FY 2024. If the analysts' forecasts are accurate, Q1 FY 2024 will mark a significant turnaround in TAL's top line performance. Notably, TAL Education had previously reported YoY revenue contraction for six consecutive quarters for the period between Q3 FY 2022 and Q4 FY 2023.

However, the sell-side analysts don't think that TAL's bottom line performance will be as good as its top line results in the first quarter of fiscal 2024. Specifically, TAL Education's normalized net loss is projected to widen from -$17.4 million for Q1 FY 2023 and -$13.1 million for Q4 FY 2023 to -$30.8 million (source: S&P Capital IQ ) in Q1 FY 2024 as per consensus forecasts.

I evaluate if TAL Education's actual Q1 FY 2024 financial results can beat the analysts' expectations in the next section.

My Prediction Is In-Line Q1 Results For TAL

In my opinion, TAL's financial performance for the first quarter of the current fiscal year should be in line with expectations. I agree with the analysts' view that TAL Education should have delivered revenue expansion and a wider net loss in the most recent quarter.

With respect to revenue growth, I think that the key top line expansion driver for TAL Education will be its new smart learning hardware products.

At the company's earlier Q4 FY 2023 results call , TAL Education noted that it is targeting "an annual shipment of about 4 million to 5 million units" for its new "smart learning pad" products in time to come. There are signs suggesting that TAL's new smart learning hardware products have been well-received by its customers. Based on a July 6, 2023 research report (not publicly available) published by China Renaissance Securities titled "Solid xPad Launch", TAL is estimated to have sold around 100,000 units of its new smart learning pad product, xPad, on the Chinese short-form video platform Douyin between March and May this year.

Therefore, management's comments and third-party estimates provide support for the view that TAL Education should have recorded positive top line growth in Q1 FY 2024.

In terms of profitability, TAL's operating expenses are expected to remain elevated as the company spends to boost revenue growth, which will be a drag on the company's bottom line going forward.

As per S&P Capital IQ data, TAL Education's selling, general & administrative or SG&A costs as a percentage of sales rose from 59.6% in Q2 FY 2023 to 70.2% in Q3 FY 2023, and stayed at a high level of 69.4% for Q4 FY 2023. It isn't surprising that TAL's SG&A expenses-to-revenue ratio has gone up, as the company needs to spend more to develop and market new products such as the smart learning pad product, xPad.

It is noteworthy that TAL Education acknowledged at its Q4 FY 2023 earnings briefing that it will continue to "seek opportunities to make strategic investments into adopting new technologies in our business." This implies that an increase in TAL's research & development expenses going forward is inevitable.

In a nutshell, the current consensus Q1 FY 2024 financial projections for TAL are pretty realistic, and I expect TAL Education's actual first quarter results to be largely aligned with the sell-side's expectations.

Closing Thoughts

TAL Education is now trading at a reasonably attractive consensus forward next twelve months' Enterprise Value-to-Revenue valuation multiple of below 1 or 0.69 times (source: S&P Capital IQ ) to be exact. But there is a low probability of TAL reporting above-expectations Q1 FY 2024 results next week, which suggests that there is a lack of catalysts to re-rate the company's shares. In that respect, I have made the decision to stick with a Hold rating for TAL Education.

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