Five Reasons to Invest in China Armco Metals 17 comments
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China Armco Metals Inc. (CNAM.OB)
Added to Geo Bargain list on August 18, 2009. ($2.39).
Company Description: China Armco Metals is engaged in the sale and distribution of metal ore and non-ferrous metals throughout the PRC and has entered the recycling business with the Company's acquisition of 22 acres of land for the construction and operation of a 1-million ton per year shredder and recycler of metals.
Data Ended 8/20/09 a
- Price = $2.95
- Trailing GAAP EPS = $0.40
- Geo calculated Fully-Taxed Trailing non-GAAP EPS = $0.28
- Geo 2009 fully taxed EPS Estimate= $0.64 b
- P/E based on Fully-Taxed Trailing non-GAAP EPS = 10.54
- P/E based on Geo 2009 fully taxed EPS Estimate= 4.61
Reasons for Optimism
- CNAM meets 9 out of 10 GeoBargain® Requirements
Requirement Comments 
Recent 52-week High (generally within 3 months) Must Reach $7.00 
30% EPS Growth Rate a - 2nd Qtr. 2009 EPS increased 250%
- Full year 2009 Geo estimate implies an EPS growth rate of 125%
10% Revenue Growth - 2nd Qtr. 2009 revenue increased 71.8%
Strong Balance Sheet As of 2nd Qtr 2009 YES Positive Cash Flow - $ 17.1 Million as of 2nd Qtr. 2009
YES Debt to Equity Ratio less than 20% 0.0% (We still need to verify) NO Current Ratio is at least 2:1 1.3:1 Return on Equity is at least 15% 6 Months Trailing 18.6% Minimum Pre-tax Operating Margins of 8% 15% as of 2nd Qtr. 2009 Preferably Under 50 Million Shares 10.1 Million shares as of 2nd Qtr. 2009 High Insider Ownership (generally greater than 15%) >15% Limited Institutional Ownership (generally less than 20%) <20% P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. a 0.063 Recently reported a substantial increase in revenues and net income for its 2009 second quarter.
- Revenues increased 71.8% to $22.5 million
- GAAP EPS increased 38% to $0.33
- Geo calculated tax-adjusted non-GAAP EPS increased 250% to $0.21
- China Armco should directly benefit from the China stimulus plan. On July 16, 2009 China released figures stating that GDP growth for the 2009 second quarter came in at 7.9%, easily surpassing expectations and giving some indication that the government's quick and aggressive response to the global recession is taking hold. (Source: GeoTeam report, Capitalizing on China's Stimulus Plan - Part I.)
- Favorable industry trends as discussed in the China Armco's filings:
- Steel - We believe that domestic steel production will continue to witness significant growth as China continues to grow. The steel industry is an important basic industry of the national economy of China, and plays a vital role in the recent industrialization efforts of the country. Production volume in China has more than doubled within the past five years. China’s share of the world's steel production continued to grow in 2008 representing 38% of the world's total crude steel production.
- Recycling - The energy saved by recycling reduces the annual energy consumption of the industry by approximately 75%, which supports the government's energy conservation goals. The PRC identified the scrap metal recycling industry as a way to minimize the use of scarce natural resources and reduce energy consumption and emissions in the steel manufacturing industry. In China, the scrap metal recycling industry is highly fragmented with no dominant player.
- Comments suggest that China Armco Metals can continue to show dramatic growth in coming quarters.
- We are extremely pleased to have secured this $12 million credit facility. We see continued evidence that the Chinese economy is on the road to recovery and there has been an increasing demand for commodities coupled with a rising price environment. We believe this additional financial flexibility will enable us to opportunistically grow our distribution business and significantly improve our overall operating results.
- Our sales efforts in the second quarter benefited from a strong rebound in several key metal markets. We believe this momentum will continue in the coming quarters and we intend to make every effort to improve our operating results further. We believe our expanded credit lines, coupled with the anticipated launch of our scrap metal recycling facility later this year places the company in the strongest financial position in its history and poised for an extended period of exceptional growth for the benefit of our shareholders.
Potential Valuation Scenarios if the company can achieve its EPS growth goals
Short-Term Potential value based on fully taxed adjusted trailing non-GAAP EPS
- P/E 25 * $0.28 = $7.00
- P/E 20 * $0.28 = $5.60
Short-term Potential value based on 2009 fully taxed adjusted Geo non-GAAP EPS Estimate
- P/E 15 * $0.64 = $9.60
a CNAM is not paying a full U.S. tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a tax rate of 36%.
b The GeoTeam is still investigating the possibly of dilution due to outstanding warrants. It initially appears that this becomes an issue if the stock reaches $5.00 per share.
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.
Disclosure: Long CNAM.OB
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This article has 17 comments:
Maj, President
The GeoTeam
Maj
GeoTeam
On Aug 22 09:47 AM Glen Bradford wrote:
> Was buying this around $1. $CNAM
On Aug 22 04:05 PM don482 wrote:
> Didn't the second quarter earnings include a one time sale of $10.6
> million? Without this extraordinary item revenue would have been
> down on a year to year comparison.
I'm not sure how this all of the sudden became "China Expert's" smear campaign against GeoInvesting. THAT is so sad. We are a legitimate company that has found much success in the methods that we utilize to research and invest in companies...something that had been proven WAY before we started sharing our knowledge and techniques with our peers. I kindly ask that we work together in assessing the opportunities present when investing in Chinese stocks. If you want to find what you feel to be shortcomings in third party research, at least please do it in a collaborative manner that we can ALL appreciate. Combative tones only lead to a break down in the system and are totally distracting.
And for the record, the kind of collaborative feedback we liked from you was here:
stockwidget.seekingalp...
That is the reason we started to follow you in the first place...because we thought you could offer added valuable insight.
As far as your first comment here regarding CNAM, my supervisor will most likely address your concerns.
And we do own CBPO and SKBI, both companies on which we comment at GeoInvesting!! 2 Stocks we can agree upon!!
Anyways, for what it is worth, that is my stance.
Zou
GeoTeam Member
On Aug 24 03:53 PM China Expert wrote:
> This is forum for "touting" stocks to retail investors who spend
> more time looking at a menu in a restaurant than looking at a 10K
> in which they will spend 1,000 times more. This "five reasons article"
> is nothing more than a way of "pimping" someones long position flogging
> EPS without focusing on risks in the company. If you want a FCF/Deep
> value idea ... look at CBPO and SKBI...... both have hair on them
> as most Chinese stocks do but the metrics are compelling. The is
> not the forum for "real" analysis but for many "investors", I guess
> this is as good as it gets. So Sad !
It seems like you really did your home work on finding useless information. Not one comment about industry or company fundamentals. You should be asking about the one big order in the second quarter or if the company will be able to offset dilution once warrants become an issue. You should be asking if there will be any unforeseen expenses associated with the start up of their recycling facility or if they will need to raise more capital. Will CNAM.OB experience margin improvements from its new recycling endeavor and how long will it take the company to start seeing benefits from the facility? How do they plan on growing their mature core distribution business?
But here were your concerns:
1. Q-Why did the company terminate its IR relationship early this year?
A-Why don’t you call and ask them before you make assumptions. It’s not uncommon for companies to change IR firms.
2. Q-Why doesn't the company have an English speaking spokesman?
A-LMAO. They do have English speaking representatives, at the company and its IR firm. Do your homework. Did you even call the IR firm?
3. Q-Maybe they'd be attending some of the Chinese investor conferences at Roth or Rodman?
A-The CEO will be in town soon to meet with investors. There story has just begun to gain traction. By the way they did have representation at the Rodman conference. LMAO!!
4. Q-Not one of the investors in the "deal" is a recognized investor in Chinese companies. hmmm.
A-Maybe you don’t recognize them. hmmm
5. Q-Overhang at $5.00.
A-Ok let me get this straight; you think the stock is going over $5.00 yet you still don’t like it. $5.00 is fine for investors who bought this stock between $1.00 and $3.00. I can handle more than a double. I am more concerned about fundamentals. But, what can I say, you are the expert.
5. Q-Its nice that the company on August 11, 2009, Armet obtained a RMB 90 million three-year line of credit from a financial institution guaranteed by the Company’s chairman and CEO, none of which have be drawn as of August 14, 2009; the interest is a floating rate not to exceed 5%.......Nonetheless..... Smells here???
A-Many loans are guaranteed by company directors. You really don’t see this as sign of confidence? Seriously??? What smells? Please enlighten us?
6. Q-No Chinese fund has purchased any shares since going public.
A-Who cares??? Most funds are late to the party any way. They will come at higher prices as they inevitably always do. As an expert you should know that you want to get into a stock before the institutions do.
7. Q-If management stays away.....then I will stay away.
A-Do you know how much stock insiders own???
8. Q-Good luck pumping this to "retail" investors.
A-Are you telling me the very few stocks you have generously commented on are not driven by retail investors?
You need to stop overanalyzing and start to really understand how Wall Street operates.
Sincerely,
Maj
President
GeoInvesting
On Aug 23 09:09 PM China Expert wrote:
> I wondered what happened to this company so I spent a few moments
> looking at it. Questions: 1) Why did the company terminate its IR
> relationship early this year ? Hmmmmmm 2) Why doesn't the company
> have an English speaking spokesman ? If they did....maybe they'd
> be attending some of the Chinese investor conferences at Roth or
> Rodman etc ....3) Not one of the investors in the "deal" is a recognized
> investor in Chinese companies....hmmmm 4) With a "cashless provision"
> for the 2.7 million warrants at $5....i expect a lot of selling overhang
> for quite a while once the stock goes over $5.....5) No Chinese
> fund has purchased any shares since going public.........Its nice
> that the company on August 11, 2009, Armet obtained a RMB 90 million
> three-year line of credit from a financial institution guaranteed
> by the Company’s chairman and CEO, none of which have be drawn as
> of August 14, 2009; the interest is a floating rate not to exceed
> 5%.......Nonetheless..... smells here..... seems the company has
> made a committed effort to stay away from investors. If management
> stays away.....then I will stay away. Good luck pumping this to "retail"
> investors.
Thank you for a good article introducing a company with clear concise information in a very easy to understand format. I agree with Aden som that the format should be a default standard for such articles. I want to also thank you for redirecting the commentator's back to the focus of the article which is providing information about a company so those of us who are not professional investors can benefit from your methods. I appreciate your efforts to educate and inform us.
Thanks for the words of encouragement. I hope you continue to benefit from our work and 20+ years of experience. A goal to successful investing is taking a complex set of circumstances and simplifying them; something we strive to accomplish.
Maj, The GeoTeam