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New Oriental Education (NYSE:EDU) is up more than 900% today after the stock underwent a one-for-ten American Depositary Shares (ADS) reverse split. The operation did not affect the fundamentals of the education specialist and investors should not get too excited by it. Indeed, after the ADS ratio change, EDU stock trading price was expected to increase proportionally, in essence, ten times higher or 1000% than the price before the change. Nevertheless, EDU stock price is up only 900% today, corresponding to a 10% decline relative to the initial stock ratio.
This should not come as a surprise for investors after the consolidation of the stock observed since the beginning of the year. EDU stock lost 43% of its market capitalization and the bearish sentiment is unlikely to stop.
The private education company was smacked by Chinese regulations. The private education company announced in November 2021 “plans to cease offering tutoring services related to academic subjects to students from kindergarten through grade nine … at all learning centers across China by the end of 2021,” accounting for approximately 50% of EDU’s total revenues. This explains the sharp correction of the stock and the bearishness of the stock.
With this adverse news, EDU’s financials are poised for a sharp deterioration. The top line is expected to decline robustly in 2022, down 34.5% to $2.8 billion, whereas the bottom line will get hammered. Indeed, after posting a net income of $344 million last year, representing a net margin of 7.82%, EDU is now expected to deliver a net loss of $1.31 billion in 2022, which should weigh significantly on its stock.
Last year, EDU had a net cash position of $1.3 billion in 2021 and generated $701 million in the free cash flow (FCF). Nevertheless, in 2022, analysts expect EDU’s free cash flow to reach a deficit of $1.53 billion, which will burn most of its cash and put the company in a challenging financial situation.
EDU trades 47% below its book value despite the virtual inflation of the stock by more than 900% today. Nevertheless, investors should not get too excited about the weak valuation and wait for an improvement of EDU’s financials before initiating a buy order.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.