American Oriental's Q3 Disappoints Again

American Oriental Bioengineering (NYSE: AOB) reported its Q3 revenues rose 12% to $78.8 million but net income fell 39% to $10.0 million. Though the company had a list of reasons for the decline, the mixed nature of American Oriental’s financial disclosures – higher revenues and lower profits – have been a fact of life all year for the company.

One of the factors has been slower sales for Shuanghuanglian Injection Powder, the company’s lead product. American Oriental says revenues for SHL will be down 30% this year. A TCM product with anti-viral effect, SHL is used to treat bronchial infections.

American Oriental also blamed its revenue decline on a greater dependence on generic drugs, which followed its acquisition of CCXA, increasing raw material prices and the low-margin revenues of its Nuo Hua distribution business. American Oriental paid $39.5 million to buy Nuo Hua last year, saying it expected $80 million in revenue during 2009 from the company. In Q3, distribution produced just $3.6 million in revenue, an annual run rate of $14.4 million that represents only 18% of predictions.

American Oriental remains a profitable company. In the first nine months of the year, its net income was $30 million on $196 million of revenue, a 15% margin. The problem is that revenues were 17% higher while net income dropped 25%.

American Oriental’s shares fell following the disappointing announcement. They slid 24 cents lower to $4.05, a loss of 6%. Over the past 12 months, the stock has traded in a range from $3.29 to $7.66. Most China life science companies are closer to their 12 month highs than l2 month lows, but American Oriental is an exception.

Because investors are worried about the company’s future, it is priced at very attractive levels. Its market cap is $317 million, only about 1.1 times sales. Its price/earnings ratio is less than 7.

Disclosure: none.

Comments

[Jason Tillberg]

You can make the case that when stocks go from being good values from a Graham and Dodd approach like AOB is now, to a Bill O'Neil approach, like AMZN is now, is where the biggest gains are ever made in stocks.

I'm long AOB and like from a valuation perspective very much. I would be happy if AOB didn't even grow earnings at all for the next 5 years. I would however worry if earning declined further. But I don't see that happening because net margins may have bottomed out.

According to Reuters ProVestor Plus Company Report, AOB had net margin for Past 5 Years at 22.7% while the sector average was 13%. For the past 12 months, AOB has net margins at 16% while the sectors was 16.4%. So they simply came back to average.

AOB's margins are now at sector average and may not fall so much from here simply based on averages.

3.80 a share now as I write. Perhaps downside is 3.50. But this is a good value again, as any growth in earnings at all is a bonus.

Wild card is they make far more lucrative acquisitions in the future.

2009 Nov 19 01:28 PM