Overview of Business
Gulf Resources (GURE) manufactures bromine, crude salt, chemical products that help in the exploration of oil and gas exploration. They operate in the Shandong province of China.
Last year, they bought one of their customers, Shouguang City Rongyuan Chemical, which was bought for more than what Gulf is currently worth. Since the purchase, Gulf Resources have been posting impressive growth for 2015 showing a 37% and 107% growth for Q3 revenue and net income respectively. Gulf Resources has also posted impressive revenue and net income growth for nine months ended for 2015. This growth is entirely driven by the massive expansion of chemical product sales over the year.
Company is currently valuated at $67 million, a miniscule 2.39 P/E. Some reasons behind this are past fraud allegations, of which were disproved. Market capitalization can also play a role, usually micro-cap stocks are not followed as frequently and can lead to lower valuations.
Their valuation also leads to a 0.21 price to book ratio. A lower price/book would make sense for a company that isn't using all of its possible financing options. However, trading at 1/5 book value of the company when it is showing signs of impressive growth is screaming undervaluation even with almost no leverage.
The company has liabilities of under $11 million. Total debt is just over $3 million, which gives the company a quick ratio of 22.97, and a debt to assets ratio of 0.00938. This company has already bought one of their customers Shouguang city company. Gulf resources is in a very advantageous position to expand and possibly buy up more customers or possibly even a competitor in the field.
The company, currently carries $1.79 in cash/equivalents on the books. By currently purchasing stock, an investor is already receiving a 17.7% return just from owning extra cash the company has on hand. Additionally, the investor reaps the $0.65 EPS the company has earned on a trailing twelve-month basis. Taking the earnings at a straight 1 to 1 value, the investor is immediately receiving a 60.5% return for that basic valuation of the stock.
Shouguang City Rongyuan Chemical has shown great potential for Gulf Resources. For Q3, they have contributed to $11,829,929 and $3,003,994 for revenue and net income respectively. Additionally, since the acquisition, for the nine months ended September 30, 2015, they have contributed $40,418,261 and $10,202,563 for revenue and net income respectively. These high margins allow GURE to have much more financial flexibility to pursue more clients for their current products and possibly acquire more companies into their portfolio.
The natural gas announced in May of 2015, was estimated to bring in an additional $4.7 million in revenue annually as well as $2.3 million in net income annually. They have not announced permission to drill yet, however, on November 10th, during their Q3 press release management said that they were very optimistic referring to receiving permission to drill the well. Announcement of permission to drill should drive the stock price up. With this, it will bring more attention to the company as a whole which should in turn show investors how undervalued this firm truly is.
This company has a lot of flexibility in terms of taking on debt, buying up competitors or customers, or honestly a multitude of options for a company that has more money than market cap. To keep it short and sweet, go for the long haul on this company, and don't check the stock price every day. As fundamentals become more apparent to investors, the stock will increase. With the impressive growth opportunities that Gulf Resources currently has, it could be valued at 15x earnings. That alone prices the stock at $9.75/share, not including current cash on hand, the large opportunity for expansion through leverage, or the current natural gas reservoir that they are sitting on. It is very volatile but fundamentals like these will only make the company appreciate in value for the long run.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GURE over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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