Zhongpin Has Great Earnings, but Does Anyone Care?

Aug.12.08 | About: Zhongpin Inc. (HOGS)

We continue to wallow in stocks growing 100% a year but trading at 10-15x forward earnings.... watching the junk of the market, in some cases growing 5-15% and in some cases shrinking, being run up 30-40-50%, while some of our holdings die on the vine is an exercise in frustration.

Zhongpin (NASDAQ:HOGS) put out yet another astounding quarter but if a company executes in a forest and its doesn't have subprime, American consumer, or fuel cost exposure does anyone care? We've held this stock for quarters now and the stock price has barely budged. Maybe when it trades at forward P/E of 6 on 100%+ growth it can go up 5%. Or if it goes into the airline business.

  • Revenues increased $73.8 million, or 116.0%, to a record $137.5 million from $63.7 million in the second quarter of 2007. The significant increase in revenue was due to increases in prices and sales of the Company's pork and pork products resulting primarily from increased sales to food services distributors and to restaurants and non-commercial customers. (Keep in mind one facility in Sichuan province was closed for a month during the quarter due to earthquake.)
  • During the second quarter of 2008, the volume of pork products sold increased 47.7% from the second quarter of 2007. For the quarter, chilled pork sales increased 118.7% to $71.9 million from $32.9 million in the second quarter of 2007. Sales of chilled pork accounted for 52.3% of net sales during the quarter, up from 51.6% a year ago. Revenue from frozen pork was $49.0 million, up 120.5% from $22.2 million in the second quarter of 2007, accounting for 35.6% of net sales compared with 34.9% in the second quarter of last year. Prepared pork products increased 121.2% to $13.2 million from $6.0 million in the same period a year ago. Revenue from fruits and vegetables, which accounted for 2.5% of total revenues, was $3.4 million, up 30.9% from $2.6 million in the second quarter of 2007.
  • Gross profit in the second quarter of 2008 was a record $17.1 million, up 109.2% from $8.2 million in the second quarter of 2007. Gross margin was 12.4% in the second quarter of 2008 compared to 12.8% in the second quarter of 2007. The slight decrease in gross profit margin during the 2008 period was primarily due to an increase in the cost of raw materials, which was offset, in part, by an increase in the market prices for pork products.
  • Income from operations for the second quarter of 2008 was $9.3 million, compared to $5.0 million the second quarter of 2007. Operating margin for the quarter was 6.8% compared to 7.8% for the second quarter of 2007
  • Net income for the second quarter of 2008 was $8.5 million, or $0.29 per fully diluted share, up from net income of $4.2 million or $0.20 per fully diluted share, in the second quarter of 2007. (Share count increase is hiding incredible bottom line growth.)

Outlook - Financial

  • Zhongpin is confident in its ability to meet guidance for full year 2008 revenues in the range of $490 million and $520 million, gross margin between 12.6% and 13.0% and net income between $30 million and $33 million, or between $0.98 and $ $1.07 per share, assuming a fully diluted share count of 30.7 million shares outstanding. This guidance excludes the impact of any future acquisitions.

Outlook - Business

  • Zhongpin has an aggressive capacity expansion plan to meet the growing demand for high quality pork products in China. Zhongpin's new facility in Luoyang City, Henan Province has begun production and this new facility is expected to ramp up to over 70% utilization rate by the fourth quarter of 2008. With the addition of the Luoyang City facility, Zhongpin now has a total annual capacity of 391,560 metric tons for chilled and frozen pork, excluding outsourcing from OEMs. The Company is currently building a chilled and frozen pork facility in eastern Henan Province in Shangqiu City, which is expected to begin operations in the fourth quarter of 2008 and will expand annual capacity for chilled and frozen pork by 80,000 metric tons.
  • The Company's new prepared meat facility at Zhongpin's Industrial Park located in Changge City, Henan Province is on schedule to begin production in the third quarter of 2008. This facility will add 28,800 metric tons in annual capacity of prepared meat, a 114% increase over Zhongpin's current capacity of 25,200 metric tons, bringing total capacity of prepared meat to 54,000 metric tons. In addition, Zhongpin plans to expand and upgrade its production line for fruits and vegetables in Changge City, Henan Province. The new lines will expand Zhongpin's production capacity for fruits and vegetables by approximately 30,000 metric tons annually and will begin production in the fourth quarter of 2008.

Another case of triple digit growth at forward P/E of 11.

Here is what you get in this market for quarter after quarter of 100% growth in this market... zilch

Disclosure: Author is long Zhongpin in fund; no personal position.