China Advanced (NASDAQ:CADC)

Added to the GeoSpecial list on 9/23/2009 @ $4.75.

    Catalyst: Appeared that EPS was about to go into second gear; Direct beneficiary from China stimulus package

    Peak performance: Reached a high of $8.50 on 10/20/2009

    Current road block: Dilution will hinder EPS growth despite sharp rise in revenue.  2011 growth is forecast to be only 16%, with most quarters under 10%.

    Removed from the GeoSpecial list

GeoSpecial CADC reported 2010 second quarter results yesterday. on a GAAP basis it looked like a stellar quarter. But a closer look at GeoCalculated non-GAAP results, after adjusting for non-operating items, revealed less impressive results.

Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures. We also applied a 25% tax rate.

Our non-GAAP EPS number differs from the company’s non-GAAP number as, in addition to subtracting a warrant gain, we also subtracted "other subsidy income." Doing this portrays a much different picture and highlights that net income growth did not nearly keep up pace with revenue growth.

Comments in its 10Q explained that margins had suffered due to increased oil prices..

"The increase of cost of revenue was due to overall increase in production from our five fixed concrete plants in the Beijing area and increased production on manufacturing and technical services as well as other services compared to the same period in 2008. The increase in cost of sales was also due to increases in crude oil prices which increased the costs of raw materials and transportation during this quarter compared to the same quarter last year. The cost of sales on concrete increased $12,459,399 this fiscal quarter compared to the same quarter last year. Such increase was due to an increase in our concrete production as a result of additional plants we added during this fiscal quarter, as well as the increase in crude oil prices as indicated above as compared to the same period last year. Cost of sales with respect to our manufacturing services increased $1,267,766 during the fiscal quarter ended December 31, 2009, as compared to the same quarter last year. Such increase was due to the increase in total operational capacity and a decrease in the utilization rate for the two new portable plants we added to our operations, as well as an increase in transportation costs."

The company did comment that it has seen  improvements in its efficiencies:

"Our production and utilization rate started picking up during the quarter as the celebration of National Day of PRC came to an end in the beginning of October. However, we are uncertain whether the crude oil prices will maintain at the current level in the near future."

The GeoTeam is faced with a difficult decision, especially as we are generally attempting to be more selective in our stock selection process. As the global economy continues to accelerate, we fear that the rise in commodity prices may continue, leaving us to ponder how this will impact CADC's future bottom line.

Overall, the earnings conference call was bullish, so we will keep CADC coded as a GeoSpecial, mainly due to its low fully adjusted trailing P/E of 6.76.  But it will not be one of our top portfolio choices until we attain a better grip on how CADC financial results will be impacted by a rise commodity prices. Also, the company is facing challenging EPS comparisons for its third and fourth quarters of $0.19 and $0.20, respectively.