Sutor Tech Group (NASDAQ:SUTR)

Added to the GeoSpecial list on July 20, 2009 @ $3.57

Catalyst: Re-pricing of Risk Premium.
Peak performance: Reached a high of $4.45 on July 28, 2009
Current Price: $2.04
 
Current road block:  No U.S. investor relation representation; Related party transactions are on the high side; Low pre-tax margins of 3.8%; High debt position of $107.7 million; Debt to Equity is a whopping 64.6%; Current ratio (current liabilities divided by current assets) is less than 2:1; Cash flow from operations is negative.

"Net cash used in operating activities was $7.2 million for the nine months ended March 31, 2010, a decrease of $61.7 million from $54.5 million net cash provided by operating activities for the same period last year.  Such decrease of net cash provided by operating activities was primarily attributable to decreased net income, increased advances to suppliers, partially offset by a reduction in account receivables. During the nine months ended March 31, 2010, we made more advances to our suppliers for the purchase of raw materials in anticipation of increased orders in the coming months."

Removed from the GeoSpecial list.  From a financial statement point of view, SUTR has a high risk profile, especially as most of its debt obligations are short-term. From an EPS growth point of view, SUTR’s picture has improved and is forecast to continue to improve entering into its fiscal 2011 year ending in June, when EPS is expected to grow 58.8%. The question becomes, how do we view SUTR as an investment option with its less than desirable financial statement position albeit an improving EPS picture? The GeoTeam is a big believer that EPS growth is the force that drives stock prices higher with quality considerations helping to determine the level of valuation multiples.  A most realistic scenario is that SUTR trades somewhere between its book value per share and 5 times 2011 EPS estimates of $0.54 . A most optimistic scenario, if the risk profile improves,  is that SUTR can attain a P/E multiple of 10 times earnings.  We are placing SUTR on the GeoSpecial on the Radar list as we await the release of its 2010 fourth quarter financial results.

The need for liquidity will likely continue to loom in the short-term.

"Our major sources of liquidity for the periods covered by this quarterly report were borrowings through short-term bank and private loans.  Our operating activities used $7.2 million of cash in the nine months ended March 31, 2010. As of March 31, 2010, our total indebtedness to non-related parties under existing short-term loans was $104.2 million, our short-term notes payable to related parties was $0.6 million, and our long-term notes payable to non-related parties was $2.9 million. We had no long-term notes payable to related parties."

"Short-term bank and private loans are likely to continue to be our key sources of financing for the foreseeable future, although in the future we may raise additional capital by issuing shares of our capital stock in an equity financing. We expect to renew our short term loans when they become due."