The IDP Education Limited (ASX: IEL) share price was top performer on the S&P/ASX 200 (INDEXASX: XJO) last week, climbing a whopping 36.4% and reaching a record high. IDP Education shares have retreated in morning trade and are currently trading 4.04% lower at $22.55.
IDP Education provides international student placement services and English language testing services. It also runs a string of English language schools in South East Asia and organises educational events and conferences globally.
The recommendation change
IDP's share price fell 18% between 20 January and 3 February on fears of the impact of the coronavirus. It later surged by 28% in one day on 12 February after an earnings report showing increases against previous calendar period (pcp) of 49% in earnings before interest and tax.
The company's earnings performance was due to improvements in revenue generation across all business lines and improvements in margin. IDP's core business of student placement saw a 30% volume growth principally from the UK and Canada.
Key to its profitability and revenue growth has been the company's rapid roll out of its computer-delivered International English Language Testing System (IELTS) over 47 countries. In addition, 37 venues were opened during FY20 H1.
Goldman Sachs' recommendation upgrade is based largely on a judgement that the current coronavirus crisis will not pose a "structural" impact on IDP's performance. The company has proven that it can manage the impact of coronavirus thus far, due to the geographical diversity of its operating locations.
Goldman Sachs estimates that IDP's exposure to China is approximately 10.9% of revenue on a full-year FY20 basis. This is revenue the company is already replacing via revenue streams and in other markets.
The value proposition
IDP is one of the true recent growth stories of the ASX. Over the past 4 years, it has a compound annual growth rate (CAGR) of 14.2% in sales, 13.7% in earnings per share and 14.8% in cash flow.
With a share price (CAGR) of 52.4%, $10,000 invested in IDP Education on 1 January 2016 would have been worth $53,909 on 1 January 2020.
IDP has demonstrated a very strong capability for turning capital into increased revenues with a return on capital expended (ROCE) of 63% in FY19 and 75% in FY18.
The company's business model means that expended capital results in additional teachers, marketing and sales resources, and resources to deliver training and student placements, which are all revenue generating units in some form or other. IDP also owns one-third of IELTS, providing an additional revenue stream.
The one issue with the IDP stock is the share price. It is presently trading at a price-to-earnings (P/E) ratio of 71.5. Historically, its P/E ratio has always been high with the FY19 average sitting at 46. The market and Goldman Sachs have clearly factored in future growth potential and expect the company to have a long runway ahead of it.
Foolish takeaway
Goldman Sachs' change in recommendation was anchored to the growth revealed by IDP in the company's H1 earnings report, which also highlighted that the impact of the coronavirus outbreak has been negligible thus far.
IDP is a very well managed growth prospect. The size of its market and the company's management have turned it into a capital compounding machine, underscored by its very strong ROCE performance. It is likely to see a full-year FY20 impact from the coronavirus, but at this stage this will be a short-term effect.
At an earnings multiple of approximately 77, investors will need to ask whether they agree this company is well positioned to continue its growth trajectory for years to come.
