International Embryo Arbitrage: Eternal Technologies Group (ETLT)

The Microcap Speculator submits: Those three words sum up the strategy of microcap Eternal Technologies Group (ticker: ETLT.OB). There are plenty of stocks with better balance sheets and growth rates, but I guarantee you will not find a microcap with a more interesting business plan.

Eternal Technologies is attempting to address China's growing need for dairy cattle. China's rapidly expanding middle class has dramatically increased demand for dairy products, but the country lacks a large herd of top breed dairy cattle. Eternal Technologies estimates that in the next 7 to 10 years, the shortage of dairy cattle in China will reach 10 million head per year. Want further proof of Chinese dairy demand? Take a look at the performance of American Dairy (ticker: ADY), a Chinese distributor of powdered milk.

Eternal Technologies has a unique solution. The company harvests embryos from top American breeds like Holstein dairy cattle, inseminates the embryos in a laboratory setting, and carefully ships the embryos back to China, where they are implanted in domestic Chinese cattle. Through this process, inferior Chinese Yellow cattle can be used to develop a superior dairy herd at a far lower cost. Etermal Technologies has already used this technique to develop a sheep herd totaling 10,000 head.

Despite the size of these projects, Eternal Technologies has a relatively modest market cap. of around $16M. That is far less than the $24M in cash and equivalents on the company's balance sheet. Eternal Technologies earned $4.23M in 2004 and expects higher earnings for full year 2005.

The massive size of the dairy cattle project poses risks that should be considered. The company will have to build significant facilities both in the United States and mainland China. The project is expected to cost about $37M, although that figure may be reduced almost 10% due to favorable tax treatment announced today. The company will use its cash horde to fund the Chinese side of this project and will raise funds to finance the American facilities. According to company projections, the dairy cattle project should begin to generate revenues in early 2006.

On September 30, 2005, Eternal Technologies also acquired a medical equipment company called E-Sea Technologies for approximately $4.5M in cash and stock. I don't know much about that division but the SEC filing said that E-Sea, at the time of acquisition, had over $4M in equity and earnings of over $1.85M. Its hard to go wrong picking up private businesses at 3x earnings.

DISCLOSURE: I am long ETLT.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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