Xueda Education Group Dropped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Xueda Education Group (NYS: XUE) -- China's version of Princeton Review -- announced this morning that it beat analyst estimates for Q2 revenue and earnings. The stock promptly sold off by as much as 16%.

So what: Surprised? Don't be. In China, just like in the U.S., investing is all about the future, and at Xueda, it's the future that's in doubt. After reporting the earnings beat, Xueda dumped cold water on hopes for a repeat in Q3, warning that revenue could come in as much as 10% below consensus (at $50 million).

Now what: For the fiscal year, Xueda is sticking with its previous promise to pull in between $222 million and $235 million in annual revenues. That would be at least 27% annual growth, and perhaps fast enough growth to justify Xueda's 33 P/E ratio. On a cautionary note, I'd want to see the company's most recent cash flow statement before buying. (Xueda did not include cash flow information in its earnings release. Tsk, tsk.) Still, at last report, free cash flow was running comfortably ahead of reported earnings. If that's still the case, the company could be an even bigger bargain than it already looks.

Want help studying up on Xueda Education?Add it to your Fool Watchlist.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool has adisclosure policy.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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