China Marine Food (NYSE AMEX:CMFO)

Added to the GeoBargain list on May 15,2009 @ $2.70

Peak performance: Reached a high of $8.63 on January 6, 2010.
Current Price: $4.80

CMFO shares are weak today. We are speculating that this may have something to do with investor uncertainty regarding an article questioning the accuracy of CMFO reported sales numbers in the United States vs. those reported in China.  We feel it is prudent to remove CMFO from the GeoBargain list until we gather more information on this matter.  Also, 2010 analyst estimates indicate that EPS will grow less than 30%.   This is a difficult decision, but we can always revisit the story again once the dust settles.

We are working with individuals who will discuss this matter in more detail as it relates to the entire ChinaHybrid space.

China Marine Food Group is in negotiations to purchase the algae-based beverage company Xianghe Food Science and Technology.

"Similar to China Marine, Xianghe has developed a network of distributors in the Fujian, Zhejiang, Guangdong and Hunan provinces which sell its branded product to stores, restaurant food supply dealers and the hospitality industry.

Preliminary 2010 estimates of revenues from Xianghe are over $20 million with net profit margins anticipated at 20%.  Through integrating the product into China Marine's distribution network and expanding distribution to untapped provinces in China, management expects revenues can accelerate significantly during 2010 and beyond."

We are not sure how much this positive development will add to earnings per share figures.  Much of it depends on whether or not the Company will use existing cash balances or raise equity. We have calculated that in a worst case scenario, if China Marine raised all the proceeds via an offering at $6, the transaction would be slightly accretive.

The use of existing cash balances would be the best case scenario, one in which we have calculated that the transaction will add $0.17 to EPS.  In this scenario we feel that investors may push shares to a range of $7.95 to $8.80, an increase of $1.70 to $2.55 from yesterday's levels.  Investors also need to consider the eventual synergies from this transaction due to opportunities to push respective products trough new distribution channels.

The purchase price to complete this deal is $27.8 million which the Company anticipates will be recovered in 4 years.  This implies that Xianghe could experience exceptional growth in net income in subsequent years. (With no growth in net income the pay back would be about seven years).

China Marine commented that contributions of the potential acquisition are not included in its current 2010 guidance of $80 million in revenues and $18 million in net income, giving us room for upside.

Source: PR Newswire (December 2, 2009)

China Marine Food reported its 2009 second quarter financial results last week.

Highlights

• Revenues increased by 12.9% to $14.8 million
• Earnings per share increased by 14% % to $0.13 million

The GeoTeam® was hoping for a slightly better EPS performance.  However, the company maintained its previously issued financial guidance of revenues in excess of $60.0 million and net income in excess of $14.3 million.  Guidance implies a 2009 EPS growth rate of ~30%, which still qualifies the stock as a GeoBargain.

Related Links
Updated Financial Table
Updated Valuation Scenarios