In line with our theme to identify bargains based on a set of criteria, we have come across Soko Fitness (OTC:SOKF), a leading operator of fitness clubs and spas in Northeast China.
Data Ended 3/8/2010
- Price = $4.15
- Trailing EPS = $0.52
- Fully-Taxed Trailing non- GAAP EPS = $0.39 a
- P/E based on Fully-Taxed Trailing EPS = 10.64
Reasons for Optimism
- SOKF currently meets 8 out of 10 Bargain Requirements
Requirement Comments Recent 52-week High (generally within 3 months) Reached high of $4.45 on 1/15/2010 30% EPS Growth Rate 2nd Qtr. 2010 EPS increased 70.0% 10% Revenue Growth 2nd Qtr. revenue increased 40.0%. Strong Cash Flow/Balance Sheet As of 2nd Qtr. 2010 YES Positive Cash Flow
YES Debt to Equity Ratio less than 20% 11.09% NO Current Ratio is at least 2:1 0.86:1 Return on Equity is at least 15% >15.0% Minimum Pre-tax Operating Margins of 8% 42.8% as of 2nd Qtr. 2010 Preferably Under 50 Million Shares 18.2 M shares as of 2nd Qtr. High Insider Ownership (generally greater than 15%) 53.3% as of 2009 10K Limited Institutional Ownership (generally less than 20%) TBD P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. 0.15
- Half of Soko's clubs are new or within the first year of operations which could lead to an acceleration of EPS growth.
- The company has selectively penetrated and expanded its target markets. Historically, Soko has operated in smaller cities that attract less competition. It has recently embarked on a plan to enter larger cities where it intends to compete using a proven business model that boasts an 81% member retention rate helping to drive practicable recurring revenue streams.
- Management seems very cognizant about increasing shareholder value and intends to use equity mainly as a means to pursue acquisitions that would be immediately accretive to EPS. We actually believe an equity raise to complete some acquisitions would not be such a bad idea. It would help alleviate the short-term drain on operations from the facilities it constructs from scratch. Generally, a brand new fitness center can take up to 18 months before it contributes to the bottom line. Right now, the company can internally fund its current expansion plans to add 7 to 9 beauty and fitness centers by the end of 2010. (The company currently has 6 fitness centers. Management has also shown that they are opportunistic by entering high growth and margin markets that have tough barriers to entry, such as the non-surgical medical beauty salon market.
- Soko has been more proactive on the investor relations front.
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 20 * $0.39 = $7.80
P/E 25 * $0.39 = $9.75
a All EPS numbers have been adjusted by the GeoTeam to reflect a Chinese tax rate of 25%.
Disclosure: Long SOKF