TAL's Cheap P/E Is a Mirage — Judge the Stock on Operating Earnings

Zacks just handed TAL Education a Rank #1 Strong Buy with an A for value, and the headline case is easy to see. The Chinese tutoring company trades at a trailing price-to-earnings ratio of about 7.6, roughly a quarter of peer New Oriental's 19.9. A high-growth stock that cheap looks like the market has given up on it. But I'd argue the market has done no such thing — that "cheap" P/E is largely an accounting mirage, and the more interesting question is whether the real business justifies the multiple it actually carries.

A P/E of 7.6 That Isn't What It Looks Like

Here is the catch buried in TAL's July 30 report for its fiscal first quarter ended May 31. Net income attributable to shareholders came in at $408 million, up more than 1,200% from $31.3 million a year earlier. That surge is not the tutoring business working harder. TAL booked $405.2 million of "other income, net" in the quarter, which management attributes mainly to fair-value fluctuations on certain investments. Pick that one-time gain out of the trailing earnings that the low P/E is computed on, and the headline multiple inflates by a lot.

The timing makes the point sharper. A year ago, with the stock around the same $12 that it trades at today, TAL's trailing P/E was roughly 60. Only in the recent quarters did reported earnings get large enough — and the latest quarter's reported number is mostly a fair-value gain — to drag the ratio down into single digits. The "undervalued" signal is being manufactured by a volatile, non-operating credit, not by an out-of-favor bargain. A retail screen that sorts on P/E will keep surfacing TAL as dirt cheap; the metric is lying to it.

The Growth Story Behind the Noise

Now the honest side, because the real thesis is better than the cheap P/E suggests — just different. Underneath the one-time gain is genuine operating leverage. Revenue rose 31.9% year over year to $758.4 million, up 25% in renminbi terms, and gross margin improved to 57.8% from 54.9%. Translate the quarter to operations and the improvement is dramatic: non-GAAP operating income jumped 492% to $149 million, and the non-GAAP operating margin expanded from 4.4% to 19.6%.

Two businesses drove that. The offline Peiyou tutoring programs delivered double-digit revenue growth, and so did the learning-devices arm of content solutions — the Xueersi-branded books and hardware that is TAL's answer to the 2021 Beijing ban on for-profit academic tutoring. Management's differentiated "technology plus content" path is the moat story: a brand and a content library that competitors would struggle to replicate quickly. The balance sheet reinforces it. Against a market cap of about $6.9 billion, TAL held roughly $2.9 billion in cash and short-term investments, and it has extended a share-repurchase program good through July 2027.

What the Cash and the Moat Are Worth

That cash is the right lens to judge the valuation, and it shows a company priced fairly for quality, not one priced for doom. On enterprise value — market cap minus the roughly 40-plus percent of it that is net cash — TAL trades around 8.4 times trailing EBITDA and barely over one times sales for a 30%-plus grower. That is a reasonable, even attractive, price for the operating story. It is not the screaming bargain the trailing P/E advertises.

Nor does price action support the contrarian setup: the stock sits near its 52-week high of $13.37, up about 14% year to date. The market has already begun to re-rate this name toward the operating improvement. Meanwhile management itself flags that growth will moderate as the base gets bigger, delivery of the new divestiture-era margin is still young, and the China regulatory overhang — the same force that erased the old TAL — has not gone away.

So I'd resist framing TAL as a contrarian value buy. The "undervalued" label does not survive the three tests I want a cheap stock to pass: the cheapness is an artifact of a one-time investment gain, the forward multiple on real earnings is far higher than 7.6, and the stock trades near its high rather than at a beaten-down entry. What's genuinely here is a well-run, cash-rich growth story whose operating margin just inflected sharply. That is worth watching on its own terms. If you judge it at all, judge it on operating income and enterprise value — not on a price-to-earnings ratio that is quietly counting a gain that won't repeat.