Global Sources Growth Prospects are Still Strong

| About: Global Sources (GSOL)

Global Sources is a business-to-business media and ecommerce company largely focused on China export markets.

Recently, shares of Global Sources have been in free fall. After hitting a 52 week high of $35 in late October, Global Sources shares have dropped all the way down to yesterday’s close of $13.25. The final blow to the stock’s decline came yesterday when Global Sources lowered its fourth quarter earnings and revenue estimates.

The core B2B business at Global Sources is still strong. Even after the recent downside revision on 2007 revenue estimates, revenue for 2007 is now expected to be $182 million compared to $156 million in 2006 and $112 million in 2005. Fourth quarter growth in on-line revenue and revenues from mainland China were up 20% and 28% respectively from the fourth quarter of 2006. The revenues for print media were lower than expected, but at Wall Street Mayhem we don’t see that as a problem going forward. Did any of the investors that were buying the stock back at $35 a share hope that print media revenues would take off? Nope, there were interested in the on-line revenue and sources fairs which are still on track.

Global Sources also plans to add several new Chinese-language online initiatives under the Global Sources brand name in 2008 which could further accelerate online growth in Chinese markets. On the sourcing-fairs-side, Global Sources plans to nearly double the size of its two China sourcing fairs in Dubai and Shanghai this year. In addition to the increased number of booths the average selling price for each booth should be up substantially in 2008 as well.

Although we typically stay away from stocks that have recently lowered estimates, the Global Sources long-term growth story is still intact and now the valuation of Global Sources shares is compelling. A trailing P/E of just under 20 seems very reasonably priced for a company with a strong growth story and a proven long term record in Asian export markets and B2B sales. Additionally, Global Sources has a strong balance sheet with $185 million in cash and no significant long-term debt.

The pre-announced top line for the first quarter was slightly lower than expected coming in at $60.8 million compared to a previous estimate of $61 to $62 million. However, the bottom line is now expected to come in at 16 cents compared to the previous estimates between 25 and 28 cents. Much of the bottom line shortfall is a result of a $3.1 million write-down on Global Source’s investment in Blue Bamboo. This is a puzzling write-down considering that the Blue Bamboo investment was very recent, but the company has now written down the entire amount of the Blue Bamboo investment so Blue Bamboo will have no effect on earnings going forward.

Back in November, Citigroup put a buy rating on Global Sources and they said that $45 a share was a fair value based on solid growth, good visibility, and a large and loyal community of active buyers. Although it appears that revenue and earnings visibility was not as good as Citigroup thought, the revenue is still close to previous estimates and the EPS took a big hit due to the Blue Bamboo write-down.

Suggested Trades:

* Buy GSOL under $14