Investors seek the best returns they can get. Individual investors want the best returns on their individual stock investments; companies, meanwhile, seek the best returns on their invested capital, or ROIC.

We went searching for companies that have done well according to both definitions of “return on investment.” Specifically, we screened for:

  • Stocks that returned more than the SPDR S&P ASX/200 ETF STW since inception.
  • Companies with average three-year fiscal ROICs exceeding 18%.
  • Companies with wide or narrow Morningstar Economic Moat Ratings.
  • Stocks that are trading at least 20% below Morningstar’s fair value estimates.

While we can’t predict whether this company and their stock will continue to generate top returns on investment, we do expect them to be competitive during the coming decade given their economic moat rating and valuation today.

IDP Education Ltd (ASX: IEL)

IDP chart
  • Price/Fair Value: 0.78 (22% undervalued) at 18 March 2024
  • Morningstar Economic Moat Rating: Narrow
  • 3 year annualised Return On Invested Capital (ROIC): 19.3%
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Education and Training Services

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 64% of fiscal 2022 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.

Student placement services is IDP’s second-largest business segment, comprising 27% of fiscal 2022 revenue. 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.

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.

The IELTS brand is one of the world’s most recognised 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 incentivises 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.

We assign IDP an Exemplary Morningstar Capital Allocation Rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distributions.

Investment efficacy is exceptional. We anticipate the company to generate a ROIC including goodwill well above its WACC (Weighted Average Cost of Capital) of 7.4%.

Shareholder distributions which have averaged 69% of net income over the last five years are appropriate and have allowed IDP to fund its growth, both organically and through acquisitions.

You’re able to access our analysts’ full report and forecasted dividends for 2024 and 2025 through Morningstar Investor.