New Energy Systems Group is a vertically integrated original design manufacturer and distributor of lithium ion batteries and backup power systems for mobile phones, laptops, digital cameras, MP3s and a variety of other portable electronics. NEWN intends to up-list from the OTC-BB to a senior U.S. exchange
On another board, some of us have been talking about PE ratios that may be applied to NEWN in order to establish a target stock price. Here is my take on the subject. In trying to determine a future stock price, we can first look at the historical PE of NEWN itself with the understanding that once up-listed to Nasdaq, the PE of NEWN will expand. We can also look at the PEs of comparable companies (peers) that are already trading on a senior exchange, and then apply the average PE of those peers to the 2010 NEWN estimate ($1.23) and see what kind of a price target that takes us to. In the following paragraphs I will do both.
First, if you look at the historical TTM PE of NEWN you will find that back on October 13th of 2009, with NEWN at its high price point, its PE was 17.718. The stock price came down from that 10/13/09 closing high of $9.56, and from about October 28th through December 30th the PE ran in the 10x to 13x range. The stock price then drifted a bit lower and from late January through today the PE ran in the 7x to 10x range. In short, the PE averaged about 10x trailing earnings since October 28th of 2009 to today. So if the NEWN PE moves back to its recent average of 10x (and it will as this market continues off of its current corrective bottom and economies continue their recoveries), then NEWN could see a price of $12.30 (10x forward earnings of $1.23). If enough people see what we see in NEWN, and move the PE back to near its historical high, then the price could move to $20.91 (17x $1.23). Things could get even better when the up-listing draws more attention to this stock or the earnings start to come in at a better level than $1.23 (and they very well could). But for now let's look for a 10x PE and a $12.30 stock price. I did a study on June 13th to see if Chinese stocks which are listed on U.S. senior exchanges can actually command a 10x PE. Of the 123 Nasdaq stocks in the China Rising data bank, 59, or 48% had a PE of 10x or better. On the China Analyst tabulation, 63 of 120 Chinese stocks (52.5%) had a 10x PE. And on the U.S. China Stocks web page, 74 of 166 or 44.6% met the 10x metric. Keep in mind that in the total number of stocks in each of the three tabulations, I included those stocks that had no PE, meaning those companies are losing money. Had I eliminated those "no PE" stocks, the percentages meeting the 10x PE criteria would have been much higher. Additionally, the stocks in the Tickerspy battery index (*BTTRY) have an average PE of 12.1x. So there is a lot of evidence that a 10x PE for a growth company like NEWN, after up-listing, is easily achievable, which gives credibility to our $12.30 target.
Second, I think that HPJ and ABAT are the closest "look alike" companies (peers) of the 21 that I reviewed. They both trade on Nasdaq. As of yesterday's close, the average PE of those two companies was 10.34. If we apply that 10.34 to the NEWN $1.23 estimate, we get a forward price of $12.72. And as this bull market expands, the PEs of these peers should also expand.
For those of you who question the power of an up-listing for quality companies, on June 11th, Sino Clean Energy announced it was approved for a Nasdaq listing and would begin trading on the Nasdaq Global Market on June 14th. The stock moved up over 17% on June 11th. The stock continued up and closed yesterday 25% higher than its June 10th close. Also, the China Rising newsletter tabulates the average PE ratios for Chinese stocks listed on the various U.S. exchanges. Their latest report uses prices at the end of January which are a bit old but still gives us a relative picture of the PE ratio on the several exchanges. The report shows that the average PE for Chinese stocks was 20.0x on the NYSE, 22.8x on Nasdaq, 13.2x on the AMEX/NYSE (which is why we don't want a AMEX listing for NEWN), and 12.6x on the OTC-BB. Note that the average PE for Chinese stocks on Nasdaq is almost twice that of the OTC-BB which once again suggests an up-listing to Nasdaq, for NEWN, could give the stock a considerable boost. In my judgment, NEWN is more than an average company so could command, once up-listed, a PE over the average.
Moving away from PE considerations, let's turn our thoughts to the NEWN PEG ratio. As most of you know, the PEG is a ratio of the ttm PE to the earnings growth rate. The lower the better and we usually want a PEG below "1" because at "1" the growth rate matches the PE suggesting we may have achieved fair value. Using the adjusted net of $.89 EPS for FY 2009, the adjusted net of $1.23 (company estimate) of 2010, and yesterday's closing price, the "2009 to 2010" PEG calculates to .20 which indicates NEWN is trading at a stock price way too low relative to its growth rate. The up-listing itself will not immediately drive this stock price so far up as to achieve a PEG of "1". But the up-listing will be a necessary step toward eventually achieving that goal. Some of you may ask what the stock price of NEWN would be with a PEG of "1". That answer would be $34 per share. And then you would add that it is ridiculous to believe that NEWN could achieve a 26x ($34 / $1.23) PE ratio by the end of the year. Yes, that would seem to be wishful thinking and probably is, for now. I will, instead, still hold to a $12.30 per share target. But keep in mind that in the "U.S. ChinaStocks" list of 166 China stocks, after throwing out those stocks with no PE or a negative PE, 24% of the remaining stocks, as of Friday, had a PE of over 26x.
Here are some miscellaneous reminders:
1) EPS (adjusted net per share) in FY 2010 is expected to grow by 38% even in the face of higher tax rates.
2) One more independent board member is required before application for up-listing. The new member should be on board by the end of this month, and we are half way through this month.
3) NEWN has signed a distribution agreement with A-Solar, a European-based distributor of solar powered products for charging mobile devices, and, in 2010, NEWN --- "will be focusing significant attention on our international expansion strategy particularly for the U.S. market". The $1.23 for 2010 does not include any new sales to America.
4) The Company does not have to raise capital through a capital offering and--- "will not have to engage in meaningful new capital investment in the coming years". The balance sheet is healthy and the accelerating revenue and earnings growth should keep it that way.
5) NEWN will continue to focus on R&D and wants to launch at least 2 new lithium products, on average, per month. As an example, the Company states that the new battery backup systems they are launching are more advanced than those of competitors.
6) Reflecting the new acquisitions, and confirming the wisdom of those acquisitions, first quarter revenue increased by 753%, GAAP EPS by 235%, and adjusted EPS by 297%. These growth rates were realized because of the recent acquisitions and because of comparisons with a weak Q1 of 2009, so the magnitude of these percentage gains will be difficult to maintain going forward. But significant growth will continue as there is plenty of room for product expansion, market expansion, and internal efficiency improvement (increased profit margins) as the acquired companies are integrated into the overall operations. And NEWN is certainly in the right place (China) with the world's highest economic growth rate and the world's largest population. And this Company is also in the right industry. As the Company put it, " We anticipate that there will be even greater demand for lithium ion batteries in China and world-wide in the next few years as the current trend towards smaller and lighter portable consumer products continues to gain momentum. Global lithium ion battery adoption has been significant, and many personal consumer products, such as phones and laptops, are now being powered by lithium ion technology."
We may really have a stealth tiger by the tail with NEWN. Of the many up-listing candidates, this one is the most intriguing. In a few months NEWN could be at least a $12 stock with more to come as the Company grows its revenue and earnings numbers. And $12 is 74% above yesterday's closing price. You've got to love the possibilities. I believe this Company will deliver. We just need to own the stock and be patient.
As always, just one opinion.