The Idp Education Ltd (ASX: IEL) share price continues to power ahead with the stock hitting a record high during lunch time trade. But this could be the time to take profit if UBS is to be believed.
The broker downgraded the stock to “sell” from “neutral” even after the student services group posted a solid first half result yesterday, which sent the IDP share price surging over 20%.
The downgrade isn’t hurting sentiment. IDP is among the best performing ASX shares on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today along with the NEWS CORP/IDR UNRESTR (ASX: NWS) share price, GPT Group (ASX: GPT) share price and NIB Holdings Limited (ASX: NIB) share price.
The IDP Education share price added another 2.3% at the time of writing to trade at $14.12 as the market can’t seem to get enough of the stock after management delivered a 33% increase in first half earnings before interest, tax, depreciation and amortisation (EBITDA) to $66.8 million and a 26% improvement in revenue to $304.3 million.
Is IDP’s share price reaching a peak?
UBS acknowledges the strong results and increased its price target to $12.90 from $11.30 a share, although it thinks the stock has overshot to the upside.
“Almost every section of the business is delivering growth, the digital strategy is progressing well – which presents a real opportunity to take market share,” said the broker.
“While the business should continue to enjoy strong growth, we think valuation at current levels is stretched – IEL trading on a FY20 PE of 41.1x while offering 3yr (FY20-23E) EPS CAGR of 18%.”
The high P/E looks a little rich for my blood too but not everyone thinks the stock could be hitting a peak.
Not all doom and gloom
Morgan Stanley is not put off by the high valuation as the broker reiterated its “overweight” recommendation on the stock as it upped its price target to $16 from $11.80 a share.
The broker was impressed by IDP’s EBITDA margin expansion and its expansion potential with management opening new offices in Pakistan and looking to enter the Nigerian market by FY20.
“These countries have a combined population of nearly 400m with under-developed tertiary sectors,” said Morgan Stanely.
“IEL also expects to open up more destination markets to Chinese students (Canada and potentially USA).”
I think IDP has a great outlook but we have entered into a late-stage bull market and this is not the right time in the cycle to be investing in high P/E stocks.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings 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.