American Dairy: How to Milk the Chinese Market

My stock recommendation today is American Dairy (ADY), a Chinese producer of milk powder, soybean milk powder, walnut products and other dairy stuff.

China isn’t known as a big consumer of dairy goods. Many Chinese find cheese distasteful and just don’t enjoy yogurt, buttermilk and the rest of the milk-based foods that delight Westerners. But that’s changing … a little.

You can’t call a company with $266 million in annual sales a major trend, but it’s a start. The Chinese are finding a place in their child-rearing regimen for milk-based infant formula, and the potential is enormous.

The company has been around since 1985, and its product mix – where do walnuts fit in with milk products, you might ask – reflects a kind of opportunistic management style that takes opportunities where it finds them.

It took two successive quarters of amazing results to put ADY on investors’ radar screens. In Q4 2008, the company turned in an astonishing 1,550% jump in earnings on just a 25% gain in revenues. Then, just to prove that that wasn’t a fluke, the company’s Q1 report revealed a 278% earnings jump on a 191% boost in revenues. After-tax profit margin for Q1 was a respectable 24.4%.

The milk business in China has had to do a lot of fence mending following last year’s melamine-tainting scandal. American Dairy came through that with its record clean as a whistle and growth has been excellent since then.

The stock bottomed at 9 in March, and since then has gone off like a rocket, soaring to 44 two weeks ago. ADY has been correcting with the market, but it’s holding above its 25-day moving average, which is right at 38. The stock will need to settle down a little and build a new base for further advances. But you don’t find many stocks that turn in nearly five-bagger performance in less than six weeks. It’s worth a look.

Comments

[Egg:]

Never recommend (or buy) a stock that has tripled in less than 3 months. Just don't do it. You missed it. Get over it.

If it goes higher? Who cares. A triple was already missed.

Jun 26 06:28 PM

[HaavBline:]

"The milk business in China has had to do a lot of fence mending following last year’s melamine-tainting scandal. American Dairy came through that with its record clean as a whistle and growth has been excellent since then."

That event was the big break for American Dairy. Before, it was a minor player against much larger, well-established competitors. After, most major competitors, especially those in China's North/Northeast covered by ADI, were deeply (some mortally) wounded and thus creaded huge opportunities for them.

It appears ADI refrained from ramping up productions and sales and went for high-end, high-profit instead. This maybe a smart move because sudden accelerated expansion can easily mean lost control.

Previously I pwned this stock and took profit too early, for a small company out there, it is hard to be sure that management knows to do the right thing even though the opportunity is enormous. This is a promising growth stock and great buy if a little further correction.

Jun 26 11:53 PM

[john s. gordon:]

cultural preferences/
chinese people perceive cheese as rotten milk.
the hotels catering to westerners import butter from new zealand.
i was told that cheesy eggs are considered a delicacy in china, but when i was there i never tried any. i did try duck's feet once but wish i hadn't. when offered broiled scorpions i passed on those.
> jack

Jun 27 10:14 AM

[CLH:]

Congratulations on a great buy. Not a good buy now but Im sure its not done yet. On my watch list.

Jun 27 02:26 PM

[snoopyjc:]

So what happened on 7/13/09 when the price went from $35 down to $20 in one day?? Even if you had a stop you got murdered on this one!!

Aug 15 12:58 AM