Seeking Alpha

FinanceRomance's  Instablog

FinanceRomance
Send Message
An individual investor with a strong economics and finance background.
  • China Kangtai Cactus Bio-Tech 0 comments
    Dec 15, 2010 12:43 PM | about stocks: CKGT
    China Kangtai Cactus Bio-Tech, Inc. develops and sells products derived from cactus plants. Their products include nutraceuticals, nutritious food, health and energy drinks, beer, wine and liquor, extracts and powders, animal feed, and cigarettes for which they hold 18 product patents.

    Selected Financial Information

    2010
    Revenue

    2010
    Year/Year Growth

    2010
    Operating Margin

    2009
    Revenue

    2009
    Year/Year Growth

    2009
    Operating Margin

    2008
    Revenue

    2008
    Year/Year Growth

    2008
    Operating Margin

    $36.00 MM *

    35.64%

    33.00% *

    $26.54 MM

    30.74%

    35.90%

    $20.30 MM

    42.56%

    33.56%

    * 2010 total revenue and operating margin estimates based on company guidance given on 12/14/2010

    This analysis is focused on operating margins because of the non-cash effect of outstanding warrants on net income. All outstanding warrants will have expired by July 16, 2011.

    2010 Outlook

    Based on the company's guidance given on 12/14/2010, the full year revenue will be approximately $36 MM with 33% operating margins. This implies operating income of $11.88 MM. Excluding the effect of outstanding warrants on net income, this analysis will use the percentage of income taxes actually paid in relation to operating income. This oversimplifies the analysis, however, the outstanding warrants' effect on net income obfuscates the actual performance of the company. The first three quarters of 2010 had an income tax rate of 28% using this method. Adjusted net income (excluding the warrants' effect) will be approximately $8.55 MM for 2010, which equates to $0.40 earnings per share using 21.56 MM fully diluted shares.

    2011 Outlook

    Based on the history of revenue growth, it is fair to assume a 30% growth rate in revenue for 2011. Operating margins have been more or less stable at 33% for the last few years as shown above and given the company's focus on their higher margin cigarette business, it seems fair to assume that this operating margin will continue into 2011. Total revenue for 2011 will be estimated at $46.8 MM with operating income of $15.44 MM. Calculating net income as above yields $11.12 MM, which equates to $0.52 adjusted earnings per share using 21.56 MM fully diluted shares.This share count will not be exact given the uncertainty surrounding the exercise of the outstanding warrants, but for the sake of simplicity this analysis uses the fully diluted share count reported for the three-month period in the 2010/3 10-Q.

    Valuation

    Using the method described above to calculate adjusted earnings per share, the company has $0.36 trailing twelve months fully diluted earnings per share. The following assumptions are used for a discounted cash flow estimate of fair value: 20% growth for five years and 0% thereafter, and a 14% discount rate to adjust for the China factor and the fact that CKGT is not yet listed on a national exchange. This method yields a fair value of about $5.40. Assigning a 10 forward PE on the estimated 2011 adjusted earnings per share of $0.52 yields a fair value of $5.20. Given that the stock closed at $1.01 on 12/14/2010, it is fair to say that it is currently undervalued.

    Technical Considerations

    CKGT's stock price went from a low of $0.12 on 3/17/2009 to a high of $3.00 on 1/11/2010, a remarkable 2400% move in less than 10 months. The recent low of $0.76 on 11/24/2010 represented a retracement of a little more than 76.4% of that prior move. While it is no guarantee, it appears that the down trend that has been in place since the top at $3.00 on 1/11/2010 is finally over as evidenced by the all-time volume high on 12/14/2010 of 437k shares traded.

    Disclosure: I am long OTC:CKGT.
    Themes: Chinese small caps Stocks: CKGT
Back To FinanceRomance's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.