Worldwide Energy (PINK:WEMU)

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?
- Chinese filings match respective SEC filings.(In process)

 

Criteria	Meets Criteria	Notes
Top 100 Auditor	No	Windes & McClaughry Accountancy Corporation
Auditor Located U.S.A	Yes	Irvine, California
Satisfactory Internal Controls	No	Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2010, our disclosure controls and procedures were not effective. In light of the foregoing, we have introduced and plan to implement a number of remediation measures to address the material weaknesses described above.
No Legal issues	Yes	None Found
Customer Concentration	No	At March 31, 2010, one customer accounted for more than 10% of our quarterly sales with a sales mount of $19,871,031 or 65.5% of sales
Cash Flow Ratio is Greater than 1	No	0.17
Cash Ratio is Greater than 1	No	0.56
Buying Back Stock/Insider Buying	No	n/a

 

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests and enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task.  Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings.  Odds are we will identify some promising companies that will fail this litmus test.

GeoNuggets®- Quick Check List Highlighting Undiscovered Opportunities

Worldwide Energy & Manufacturing USA, Inc. (OTCBB:WEMU)

Price (4/19/09): $4.50   
Trailing P/E (tax adjusted): 11.54

Fiscal Year Ends In December

12 Months trailing EPS (tax adjusted): $0.39*
2009 Company Guidance (tax adjusted): $3.2 million**
2009 Implied EPS Guidance (tax adjusted): $0.91***

* EPS numbers have been adjusted by the GeoTeam to add back share holder compensation expense and reflect a standard United States tax rate.

** 2009 guidance has been adjusted by the GeoTeam to reflect a standard United States tax rate

***The Company did not provide 2009 EPS guidance.  The GeoTeam® calculated an implied 2009 EPS guidance number using year end outstanding shares of 3,509,512.

Company Description: Worldwide Energy & Manufacturing Specializes in PV panel, mechanical, electronics and fiber optic products manufacturing. The company's global customer base includes those in the industries of solar energy, wireless telecommunications, aerospace, automobiles and medical equipment.

Reasons for optimism

1. The company meets seven out of ten GeoBargain categories

	Recent 52-week high
	30% Earnings Per Share (EPS) growth rate
	10% revenue growth year over year
	Strong balance sheet
	15% minimum return on equity (ROE)
	8% minimum pre-tax margins
	Under 50 million shares outstanding
	High insider ownership
	Limited institutional ownership
	P/E at least 1/2 of EPS growth rate

2. With its renewed focus the company operates in a favorable Industry as it is aggressively targeting the Solar Market.

3. The company’s 2009 solar order backlog of $52 million already exceeds 2008 revenues of $45.9 million.

4. The company should begin to realize efficiencies from it new manufacturing facility in China, reducing the need to outsource its production.

5.  The company is forecasting 2009 net income to increase over 200% to $5 million.

Potential valuation scenarios if the company can achieve its EPS growth goals

Short-Term Potential value based on fully taxed adjusted trailing EPS 

• P/E 15*  $0.39= $5.85
• P/E 20*  $0.39= $7.80
• P/E 25*  $0.39= $9.75

Short-term Potential value based on 2009 fully taxed adjusted Implied EPS Guidance

• P/E 10*  $0.91 = $9.10
• P/E 15*  $0.91 = $13.65

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.

WEMU Reports Increased First Quarter 2008 Financial Results.

The company has not yet released a formal press release, but has reported its 10 Q with the SEC. The GeoTeam was especially surprised as to the magnitude of the profits in the quarter, given that this is typically the firm’s weakest quarter.

In our previous note we mentioned that, as of the 2007 year end 10K, the company did not meet some of the GeoTeam Preferred Minimum Requirements:

"At first glance, 2007 WEMU financials do not meet many of the GeoTeam Preferred Requirements including:

* Earnings per share (EPS) growth rate should generally be a minimum of 30% and increasing year over year.

* Company has the ability to grow revenues by at least 10% year over year.

* Return on Equity (ROE) is at least 15% "

After adjusting the quarterly numbers, for one time non-cash charges and a standard tax rate, the company appears on track to significantly exceed these Preferred Minimum Requirements.

Margins were down a bit due to some outsourcing in the new solar arena. However, the company is exploring the purchase of a solar manufacturing arm in China, thus relying less on outsourcing, which could lead to higher margins.

The GeoTeam will have more information upon the issuance of a WEMU press release.

At first glance, 2007 WEMU financials do not meet many of the GeoTeam Preferred Requirements including:

* Earnings per share (EPS) growth rate should generally be a minimum of 30% and increasing year over year.

* Company has the ability to grow revenues by at least 10% year over year.

* Return on Equity (ROE) is at least 15%

* The company is seeking profit margin improvements to ultimately achieve minimum pre-tax operating margins of 8%.

However, upon further inspection and by observing published financial estimates ( EPS growth of 130% over next two years) it appears that WEMU will meet the above-mentioned GeoTeam Minimum Requirements. Over the past several years the company has been trying to position itself for better growth opportunities and profitability:

* "Since 2005, we have begun the transition to becoming a direct contract manufacturer, operating several of our own factories" This is intended to improve margins.

* The company has announced its intention to enter the solar market in its first quarter, giving it an exciting new source of growth opportunity.

* "We plan to continue our expansion efforts through further acquisitions in 2008. We are presently evaluating a power supply factory in Shanghai, China. Additionally,
the company plans on entering the solar module industry in the first quarter of 2008."

( Source 10K 2007 )

The company comments in their Fourth Quarter press release may offer further encouragement:

* Though we did not increase earnings year-over-year, revenue was up 6.3% and we reached several important milestones, including the investment in our solar division and our recent solar module order valued at $4.8 million. I expect to generate record revenue and earnings in 2008 with substantial growth in our contract manufacturing business and our solar division."

( Source: Press, April 16, 2008 )

It appears that the stock has not garnered much attention, even after they have exceed published earnings estimates. This may be due to:

* The possibility that many investors aren't yet aware of the solar plans of the company.

* The weak 2007 numbers

* Investors waiting to see the execution of WEMU's new strategy.

* The stocks low share float.

WEMU appears to have taken on a new vision. It will be interesting to follow their progress and the execution of their plan. We hope that the 2008 First Quarter results will shed some further insight into the execution of their strategy.

We are also curious about their financing needs to fund future growth.

Due to the company's new direction, the GeoTeam feels that it may be more logical for investors to use future EPS growth rather than past EPS data as a gauge for potential valuation scenarios.

The GEO team holds shares in WEMU. Sticking with the GEO discipline, we may have good to cancel sell limits. We may change these limits or liquidate our position if new developments arise. We may also change these limits or liquidate our position to meet firm capital needs or as our market outlook changes.