Zoom Technologies Looks Cheap After Earnings, But Is the Risk Worth It?

 |  Includes: CILE, ZOOM
by: GuruFundPicks

Zoom Technologies Inc. (NASDAQ:ZOOM), a China-based manufacturer of mobile phones and other mobile products, announced its December 2010 quarterly report after the market close yesterday. Earnings at 39 cents came in 6 cents above the street consensus estimate of 33 cents, and revenue at $86.6 million came in below the $90.3 million estimate. For the next March 2011 quarter, the company is projecting lower at $53 million revenue and 17 cents in earnings versus analyst estimates of $73.5 million and 20 cents, but it is reiterating its earlier projection for the current fiscal year ending December 2011, at $320-340 million revenue and $16-17 million in net income or 92-95 cents in earnings.

The key driver for ZOOM’s growth has been growth in China’s robust mobile phone market, which the company says is expected to continue to grow from the current 64% penetration rate. Also, the Chinese nationwide migration to 3G and associated demand for more data, web access and connected applications is expected to lead to higher demand for its ‘Leimone’ brand mobile phones, and the company is projecting a doubling of their Leimone brand phone sales for fiscal year 2011 over the prior year, driven by a planned introduction of 25 new models including five new 3G models in 2011.

Institutions have been net buyers of the stock recently, with 13 institutions holding a total of 0.7 million shares, or 4% of the shares outstanding up from 0% in the prior period. Also, the stock was initiated by Ladenburg Thalmann in January 2011 at a buy and a $7 target.

At yesterday’s closing price of $3.79, the company looks like a bargain from a P/E and growth perspective as it is trading at just over 4x P/E while revenue is projected to grow over 30%. However, this attractiveness of the stock should be balanced against the prevailing negative sentiment in the market against Chinese small-caps due to accounting allegations at many other Chinese small-caps in recent weeks that is weighing down on the entire sector. This may put a lid on any rally from this attractive earnings report, and as such the stock can be expected to continue trading in the $3.5-4.5 range in the interim until sentiment in the Chinese small-cap space shifts to positive.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix by Edgar Online.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Material presented here is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion.