Finding quality stocks trading at a cheap price can be a challenging and time-consuming task. You not only need to identify whether a company has a tangible edge over its peers. You also need to assess whether a stock is over- or under-valued.

The Global Best Ideas list (available for Morningstar Investor subscribers) is compiled by Morningstar’s equity analysts every month. To earn a spot on the list, these stocks have high analyst conviction in their future prospects and are trading at a price significantly below what our analysts calculate them to be worth.

Buying stocks when they are undervalued gives investor’s a higher margin of safety, therefore reducing the risk of an uncertain future.

Additionally, analysts consider the stock’s moat rating. This rating is an indication of the analyst’s expectations for the company to maintain a sustainable competitive advantage. A wide moat rating is awarded to companies that are expected to maintain and grow their earnings for at least the next 20 years, a narrow moat for the next 10 years.

Brian Han, Director of Equity Research, says of the list “These Best Ideas are sourced from all main sectors of the market, to provide a diversity of names across the spectrum. The last thing investors want is a Best Ideas list chock-full of cheap mining stocks when commodity prices tank, or a litany of oversold retail stocks when consumer sentiment slumps.”

New editions to the November list

In the November edition of Global Equity Best idea two new ASX listed shares were added. One came off the list. One of the new ASX editions was IDP Education IEL

We think the market has a short-sighted view of IDP Education, driven by recent declining volumes and regulatory uncertainty. We agree that the short-term outlook is soft, and we forecast IDP's earnings to go backward in fiscal 2025. But we expect the firm to continue taking market share as the industry preferences quality operators like IDP.

We see compelling long-term value given foreign-student caps are temporary and in response to temporary cyclical concerns. The pricing outlook remains positive in the near term, with IDP negotiating improved terms and universities looking to raise tuition fees in light of the undersupply. We expect IDP to benefit from the long-term macroeconomic drivers that underpin the international education industry.

More about IDP Education

Business strategy and outlook

IDP Education is a global leader in education services, providing English language testing and teaching, student placement services, digital marketing, and education events.

The English language testing business is IDP’s largest business segment, comprising 47% of fiscal 2024 revenue. As part-owner of International English Language Testing System, or IELTS, IDP operates one of the world’s most widely accepted English language tests for access to education institutions, professional bodies, and visas. Over the past decade, IELTS has lost English proficiency certification exclusivity for most of the institutions where IELTS is accepted, leading to increased competition for test takers. With the acquisition of the British Council’s Indian operations, another part-owner of IELTS, IDP has set the stage for reduced competitive pressures in India, the world’s largest English language testing market.

Student placement services is IDP’s second-largest business segment, comprising 43% of fiscal 2024 revenue. Over the decade prior to the covid-19 pandemic, IDP’s student placement services business has also been IDP’s main engine for growth, with growth primarily coming from India as a fast-growing source country and the United Kingdom and Canada as fast-growing destination countries. Since the covid-19 pandemic and the ensuing temporary closure of Australia’s borders to foreign students, IDP’s Australian student placement business had shrunk by more than half. Although some of this volume has been picked up by other destination countries, IDP’s overall student placement business only recovered to pre-pandemic levels in fiscal 2022. Given that half of IDP’s prospective students find IDP through word-of-mouth, we believe IDP’s key near-term challenge will be to reignite demand for its student placement services.

Moat rating

Learn more about finding companies with sustainable competitive advantages.

We award IDP a narrow moat rating, primarily derived from network effects in its English language testing business. We think these network effects provide IDP with a competitive advantage which is durable for at least the next decade.

IDP, together with the British Council, or BC, and Cambridge Assessment, or CA, is a part-owner of the International English Language Testing System, or IELTS, including its test materials and brand. IDP and BC function as the exclusive distributors and administrators of the test and CA is responsible for developing the test materials. As part-owner of IELTS, IDP effectively operates as a gatekeeper between prospective students, employees and migrants who need to pay IDP for access to opportunities to study, work, and migrate.

The IELTS brand is one of the world’s most recognized and trusted certifiers of English proficiency and is used by over 11,000 education institutions, employers, and migration authorities globally. As IDP is granted more licensing rights as an English proficiency certifier, the IELTS certification itself becomes more valuable for its wider acceptance and thereby attracts additional prospective students, employees, and migrants. This in turn incentivizes additional education institutions, employers, and migration authorities to accept the IELTS certification to tap into large pools of prospective students, employees and migrants, thereby creating a network effect. We believe that this market dynamic has created a self-reinforcing mechanism whereby a small number of first- and fast-movers have reached widespread acceptance of their respective certification schemes and have establish an oligopolistic market structure with barriers to entry.

IDP’s student placement services business acts as a broker between students and education institutions by advising prospective students on study options and assisting with applications to education institutions and migration authorities. IDP has student recruitment services agreements with hundreds of education institutions across Australia, the UK, Canada, the US, New Zealand, and Ireland.

IDP’s student placement services business benefits from a virtuous cycle and shows traces of a network effect. As IDP increases the quantity and quality of its available study options, the value of IDP’s student placement services increase for prospective students. Similarly, as IDP grows the number of prospective students using its services, IDP can offer prospective education institutions access to a larger pool of prospective students, which can increase the quantity and quality of customers of their education services.

However, even though IDP operates one of the largest student placement services businesses in the world, this part of the business does not enjoy a sufficiently strong competitive advantage to warrant an economic moat. The education market is characterized by information asymmetry where uninformed buyers, or students, need to navigate options whose value and accessibility cannot easily be determined by them. Similarly, from the perspective of education institutions, it is difficult to assess the likelihood of success for prospective students. Companies like IDP help alleviate some of these challenges by advising students on appropriate study options commensurate with their preferences and abilities and by providing a measure of certainty to students that their applications to education institutions and migration authorities will be accepted. IDP competes in this market with other placement services, most of whom focus on a particular source or destination country, as well as with education institutions’ own direct marketing channels. Although IDP displays traces of a network effect due to its large pool of students and its broad offering of destinations, its competitors’ pools of students and institutions also have critical mass to effectively compete with IDP. We do not consider brand or reputation to provide a meaningful moat due to the difficulties inherent in assessing prospective students. We also believe that from the perspective of the education institution, student brokers are undifferentiated producers of volume, thereby limited pricing power. Throughout the network, the marginal value of additional students and additional education institutions is limited.

IDP’s English language schools and education events are largely commoditized services, and its consultancy services are currently nascent and do not display competitive advantages yet.

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Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.