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L&L Energy

|Includes: L&L Energy, Inc. (LLEN)

L&L Energy is a U.S. company that operates in the coal industry in China. Their 2011 guidance is for 1.61 EPS. However this should easily be surpassed, the 1.61 figure is derived just from existing capacity expansions. With the macro environment perfect for coal consolidators like LLEN they should easily beat EPS guidance. The chinese government is promoting consolidation in the industry in an attempt to bring improved safety/health standards to the country. This mainly affects small miners who must be acquired by larger operators. L&L has taken full advantage of this by acquiring these small operators at substantial discounts. Looking out to the near future the company plans on acquiring larger targets that'll be more EPS accretive, and luckily for shareholders they plan to finance with debt. So with no/minimal share dilution any acquisition should enable L&L to beat 1.61. As of time of writing L&L is at 7.29 a six month low, and priced at 4.5x conservative 2011 earnings for a company with 395% growth YOY. Although that rate of growth is unsustainable, L&L will remain a high growth company. L&L could fall more in the short term, due to risk aversion trends in Chinese smallcaps (Even though L&L is American they correlate with Chinese smallcaps instead of the russell), monetary tightening news out of China, breakdown of Support levels, delay in switching auditors, etc. A simple 10x multiple next year, when most of these issues will be resolved would place L&L north of $16 an 120% upside. Another issue weighing heavily on the stock has been the Shunda acquistion. The Shunda acquisition would have doubled L&L 's mining capacity and nearly tripled their coal washing capacity. Alot of traders and investors were waiting for confirmation of the Shunda acquisition, which never came. LLEN eventually decided not to acquire the facility due to potential safety issues, while this instantly hurt the stock near term. It did however show managements dedication both to the company long term and to avoiding accidents which is a necisity if L&L wants to be a sucessful American Company operating in China. Also management owns 25%+ of stock, so their money is right alongside yours.

On a side note PUDA is quantitatively cheaper, but with LLEN you have executives who have and will successfully execute M&A, so I believe LLEN's risk/reward is more attractive.

Disclosure: Long LLEN