37% higher in 3 months – is the G8 Education share price a buy?

The G8 Education Ltd (ASX: GEM) share price has rocketed to about 37% higher in the last three months – is it a buy?

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The G8 Education Ltd (ASX: GEM) share price has rocketed about 37% higher in the last three months, from a low of $1.88 in October 2018 to close at $2.74 on Tuesday.

Amidst the jubilee of the turnaround, I think it is prudent to ask:

Is the G8 Education share price a buy?

The current upbeat sentiment with G8 Education's share price can be summarised with a quote by Warren Buffett:

"Equities will do well over time — you just have to avoid getting excited when other people are getting excited."

I think the excitement with the recent G8 Education share price run may be unsustainable in the near term. Here's why.

The industry-wide oversupply of child care centres has brought about the dilution of the occupancy rate and has contributed to a slide in profit. Until the oversupply is stemmed, profit is likely to be restrained.

Based on past records, G8 Education revealed slower revenue growth from 70% in 2014 to a mere 2.08% in 2017.

G8 Education's earnings per share for the aforementioned period also retreated in growth, from positive growth of 43.17% to negative growth of 10.89%.

In the 2018 half-yearly report, earnings before interest and tax are reported 20% lower against the 2017 half-year report.

With the reporting season just around the corner, you may want to keep an eye on the upcoming earnings to make a further assessment of G8 Education's growth potential.

G8 Education's dividend payout reduced to 4.5c in October 2018 from 10c per half year in Mar 2018. This has caused further discomfort for income investors.

Foolish Takeaway

The G8 Education share price seems attractive at the current level of around $2.75 versus a year ago when it was trading at $4.55. However, with the looming issues such as the oversupply of child care centres and weak earnings, I think you may want to hold your horses.

Meanwhile, I would suggest you take a look at other discretionary shares such as InvoCare Limited (ASX: IVC) or Aristocrat Leisure Limited (ASX: ALL).

Motley Fool contributor Ivan Loh has no position in any of the stocks mentioned. The Motley Fool Australia has recommended InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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