GeoTeam Tackles Earnings Season, Part 2

So far, a good deal of ChinaHybrid stocks have either reported strong June 2010 financial results, exceeded analysts estimates or issued positive business outlooks. Unfortunately, prices have not really responded, held back by weak market sentiment and rumor mongering on the China front.

EPS growth for our tier one stocks was strong:

All three stocks in our tier one list came through with stellar results. China Mediaexpress Holding (NASDAQ:CCME) and Deer Consumer Products (NASDAQ:DEER) smashed estimates, while China Digital Communications (NYSE AMEX:NEWN) also reported strong financial results.

Thus far, these stocks have had a muted reaction since results were announced.

We are suspecting that some trepidation in DEER shares may have resulted from:

• Trade growth data released by China that, although still strong, missed expectations.
• Negative operating cash flow.

We published a transcript of the conference call notes which conveyed bullish sentiment. We could not get our hands on the Q&A session.

Regarding CCME weakness, It could be possible that investors were hoping that the company would raise guidance. The high end of the company’s current adjusted net income guidance of $85.0 million would imply EPS of $1.08 for the last half of 2010 compared to $1.05 in the comparable 2009 period. We had a similar concern after the 2010 first quarter's performance, but the company squelched this fear. Hopefully, the next two quarters will do the same.

Possible additional reasons:

• Some investors have been questioning the accuracy of CCME financial results.  
• Selling pressure from a recently filed registration statement.

Please be aware that we are still awaiting a response from management on "the need to obtain an advertising license for certian services and for certain jurisdictions."

In general, we feel that uncertainty regarding quality issues in the ChinaHybrid Space is leading to investor confusion and trepidation.

Please see some of our initial due diligence findings.

NEWN just had its shares up-listed to the NYSE-AMEX which investors are hoping will increase exposure and trigger upward price momentum. Comments were bullish.

GeoBargain Yuhe Intl (NASDAQ:YUII) beat 2010 second quarter analyst estimates by a penny, reporting a 46.2% increase in EPS to $0.19. The company is on track to meet its financial guidance and is experiencing positive pricing trends. Shares have shown some weakness, possibly an over reaction to news that the company will experience a slight delay in the commencement of its new hatchery.

June quarter financial results for tier two companies have been mixed:

Telestone Technologies (NASDAQ:TSTC)  and China Armco Metals (NYSE AMEX:CNAM) delivered subpar second quarter EPS results. Recent updates on GeoInvesting highlighted this possibility.

We had commented on TSTC's history of sporadic quarters. On top of this:

• TSTC’s accounts receivable position has not improved.
• A negative article surfaced questioning the accounts receivable standing.

On the bright side:

• It appears that the company invested funds in preparation for the remainder of the year.
• The company has maintained previous net income guidance which implies that it will report EPS of about $1.85 for the last half of the 2010 year. TSTC reported EPS of $0.91 in the back half of 2009

It would be helpful if TSTC could issue third and fourth quarter guidance to ensure investors that it can grow quarterly EPS consistently. A recent interview with Zack Buckley, who has traveled to China on GeoInvesting's behalf We also need to be aware that the company has recently filed a prospectus allowing it to raise capital in the future.

As we expected, CNAM could not keep pace with its 2009 second quarter. Results were dismal. In addition, the company reduced its guidance for 2010 due to a delayed ramp up of its new recycling venture. However, the new 2010 guidance of $10.0 million implies adjusted EPS of $0.79 on about $11.0 million in net income for the remainder of 2010 compared to adjusted EPS of $0.27 in the 2009 comparable period (most of which came in the fourth quarter).

Will fear create opportunity?

How do you play these two stocks? Because guidance still implies rapid EPS growth for the reminder of 2010, we will continue to track CNAM and TSTC as tier two stocks. Those who monitor CNAM should keep a close eye on scrap metal prices which could impact guidance. If prices hold up, CNAM could have some impressive third and fourth quarter EPS numbers.  For TSTC, the decision is not as easy. The potential for lumpy quarters throws a wrinkle into its story, as does the continual attack by short investors. From a cursory glance, it appears that TSTC has never put together more than two strong quarterly EPS performances in a row. 

China-Biotics (NASDAQ:CHBT) had a delayed reaction to its earnings report issued on August 9, 2010. It looks like the company is well on its way to diffusing one of our roadblocks regarding concerns over short-term EPS growth. Analysts have already raised estimates, indicating that CHBT will experience 30%+ EPS growth in five of the next seven quarters.

China Valves Tech (NASDAQ:CVVT) also came through with a nice surprise, exceeding analyst estimates by ten cents  by growing 2010 second quarter EPS 56.0%.  The stock has been in a tight range since its earnings release. The Street may have taken a tepid view on shares, as the company did not increase guidance.

The Company reiterates its net income guidance of $40 million for fiscal year 2010. (This implies about $20.0 million in adjusted net income or EPS of about $0.57. The company reported adjusted net income of $13.7 million and EPS of $0.44 in the second half of 2009).

"Although we passed the midpoint of our guidance six months into the year and have a solid backlog, we choose to remain conservative at this time and will continue to provide regular updates to investors on our business," concluded Mr. Fang.

China Marine Food (NYSE AMEX:CMFO) crushed estimates, helping its shares gradually rise past $6.00 for a period if time. Recall that CMFO is battling issues over questionable comparisons between its SAIC and SEC filings.

Yongye Intl (NASDAQ:YONG) reported EPS in line with analyst estimates.

Points to ponder regarding YONG:

• Operating cash flow is negative.
  
• In the original release YONG commented that it had issued net income and EPS guidance. However, no EPS guidance was provided. The company has since retracted this statement. Some investors may wonder why a company that just claimed it would have sufficient cash resources to finance the remaining phases of the two vertical integration initiatives could not issue EPS guidance. Still the company was clear about focusing on EPS growth:

"We are committed to continuing to maximize shareholder value not just through increased sales and net income, but also through further increases in our per share earnings performance."

It is good to see that IR firms and companies are beginning to listen to our pleas to emphasize EPS growth.

Here is a response from a YONG supporter (GeoInvesting user name Ratobranco), regarding the negative cash flow position.

I don't like the A/R, but I accept it as part of their business model. It happens every 2Q, their A/R position blows up as they sell to the farmers, then get paid after the harvest. They didn't have any problem collecting in 2009, so I'm not worried about 2010. With the huge problems in the domestic Chinese and global food markets, I think YONG's customers are going to do just fine in terms of profitability.

To be honest, I think the dilutive offering we saw last year was a result of the fact that they lacked the cash flow to fund the lignite project internally. They had big investment plans with big future returns, and they needed funding. Equity markets exist for exactly that kind of situation. So, I don't see the offering as a knock on their commitment to shareholder value, nor do I think it will be a continuing trend.

Despite the A/R disadvantages associated with the business model, I'm long on YONG because (1) I'm impressed with their CFO and CEO, (2) they have a strong brand name and market position in a crucial Chinese growth industry, (3) with KPMG as the auditor, they qualify as what I would consider to be a high class equity. I can go to sleep at night knowing that they aren't a fraud, and so can fund managers, which means that when the bull market in China hybrids eventually comes to pass, they will be among the first that get to participate.

We Recently coded Eastern Envtl Solutions Corp (OTC BB:EESC) as a GeoBargain. Recall, that we have been tracking this story since March 10, 2010.  In its March 2010 first quarter the company reported net income of 1.2 million or $0.07 ($0.06 taxed). While not overly undervalued at the time, we thought  the company might be able to exceed its $4 million 2010 net income run rate and report sequentially higher EPS for its 2010 second quarter, aided by capacity expansion and a resumption of operations that were temporarily inactive. see full note

EESC is also an ideal up-listing candidate.

Last week,  the company filed its 2010 second quarter 10Q which highlighted the results of  what could be a break out quarter:

• Revenue increased 1071% to $5.2 million.
  
• Gross profit increased 706% to $2.9 million Income from operations increased 1173% to $2.8 million.
  
• Operating margin increased 385 basis points to 53.3% from 49.5%.
  
• Net income increased to $2.4 million from $180,511.
  
• $7.2 million of working capital.
  
• shareholders' equity of $16.7 million.

See more on EESC.

We are eagerly awaiting the release of financial results for Soko Fitness & Spa (OTC BB:SOKF).  According to Zack Buckley’s interview notes from the July Global Hunter conference, SOKF expects to continue to report solid EPS growth. 

To see a comprehensive list of strong ChinaHybrid EPS results, including Zst Digital Networks (NASDAQ:ZSTN) and Harbin Electric (NASDAQ:HRBN). See our full earnings recap.

On the U.S. side, GeoBargains Cpi Aerostructures (NYSE AMEX:CVU),  Electronics Corp (NYSE AMEX:IEC) and GeoSpecial Lgl Group (NYSE AMEX:LGL) reported strong quarterly results.

CVU exceeded estimates by two cents:

Second Quarter 2010 vs. 2009

• Revenue increased 10% to $12,544,625 from $11,437,691.
  
• Gross margin was 26.7% compared to 24.8%.
  
• Pre-tax income increased 31% to $1,826,254, compared to $1,389,489.
  
• Net income increased 33% to $1,205,254 or $0.18 per diluted share, compared to $903,489, or $0.14 per diluted share. Diluted earnings per share were calculated on 8.7% more shares in 2010 second quarter vs. 2009 second quarter.

But EPS growth is struggling to achieve the GeoBargain 30% requirement on a consistent basis and probably will not for the remainder of the year. However, analysts have EPS pegged to balloon to over 90.0% in 2011 and over 70.0% in each 2011 quarter. Furthermore, management has done an excellent job communicating with investors and attaining its goals. For these two reasons, we will keep CVU coded as a GeoBargain, with the understanding that short-term investors may not take to this story until 2011 rolls around.

On July 19, 2010, IEC reported financial results in line with its expectations and maintained guidance.

• Revenue of $26.1 million compared to revenue of $17.3 million.
  
• Operating profit of $2.3 million compared to operating profit of $1.3 million.
  
• Net income of $1.2 million or $0.13 per share compared to net income of $903,000 or $0.10 per share for the quarter ended June 26, 2009.

We do not believe investors will aggressively flock to IEC shares until it issues Fiscal September ending 2011 guidance.

LGL announced a monster 2010 second quarter , reporting EPS of $0.94 ($0.60 tax adjusted) and easily on its way to exceeding our high end EPS expectation of $1.77 ($1.17 tax adjusted). The company continues to build on its:

• Margin expansion initiatives
• Product expansion
• Expansion into Asia

The conference call was very bullish.

We have removed Ricks Cabaret Intl (NASDAQ:RICK) from the GeoBargain list. We just do not see how the company will meet its 2010 September guidance due the moderation of economic growth. We had originally coded RICK as GeoBargain on August 13, 2009 at $9.05. The stock reached a high of $16.05 during the first quarter of 2010 and currently trades below $7.00 per share.

Also see notes on: ANR, CTIB, SMTX, ISSI,

See notes on new GeoSpecials AEIS, BDR, SGMA and Article on ASYS, AXTI and NANO)

Stocks in danger of being removed from the GeoSpecial list:

G Willi-Food Intl (NASDAQ:WILC): dilution may hamper consistent EPS growth.
Career Education (NASDAQ:CECO): One of our worst performing stocks since the inception of GeoInvesting. Industry wide regulation and lower estimates do not bode well for this company in the near term.
Unilens Vision Inc (OTC BB:UVIC): EPS growth does not seem to be in the cards. However, we believe there is a good chance that the company goes private at some point.

Long Disclosure: YUII NEWN SOKF EESC CVU IEC LGL ANR CTIB SMTX ISSI AEIS BDR SGMA ASYS AXTI NANO