Thursday, July 23, 2015

Earnings from IEHC, New Century and Hanover Foods

IEHC reported 2015 earnings of $0.79 versus $0.63 a year earlier. Revenue increased to $16.4 M from $15.4 M a year earlier. Gross margin was was slightly better; 37% versus 36% M a year earlier.

Today, IEHC is a growing company trading at 7.7x earnings. It has no long-term debt. And it trades at book! If it trades 25% higher at 10x earnings it would still be undervalued.

A new blogger NoName Stocks has written a tremendously detailed post on the earnings results. So, I feel no need to repeat what he wrote. But I'll summarize and emphasize some important points. The company increased book value by $1.8 M as a result of the increased retained earnings. This amount is not reflected in cash however. It is instead reflected mostly in inventory and, to a lesser extent, accounts receivable and PP&E. The report stated that order backlog is up to $8.7M from $5.9M a year earlier. All this indicates that the company is experiencing a secular increase in demand for its products. The company needs to increase production capacity and it is in the midst of doing that. The company purchased several new machines. While it is doing that however, margin may temporarily compress. So, it is good news that margins have been flat at 37%.

New Century Group Hong Kong (HK:234) reported earnings of 1.71 HK¢ versus 0.52 ¢ a year earlier. The stock spiked to 25.5 ¢ on the news. See the chart below. The stock has twice spiked in the last year, each time on earnings results — in November 2014 and May 2015.

The stock carries 25.5 ¢ of equity per share. And the balance sheet is liquid. 43.2% of the balance sheet is investment properties, 35.2% is cash, and 26.3% is in stocks. So the market value should be close to the book value. Anyone looking at the chart must be puzzled as to why the stock can drop to the 13 ¢ range. The last time it happened was just a few weeks after the earnings announcement. And maybe the following picture of a typical brokerage firm shows why. While in US markets retail investors make up around 40% of stock ownership, in China it is 80%. Many of the retail investors buy stocks in those types of operations. They are basically people who want to do online trading but who do not have home computers setup for it.

Price 102.500
Market Cap 76.49 M
P/E TTM 12.1 x
Div yield 1.1 %
P/BV 0.34
ROE2.8 %
From what I can gather, these investors are not really investors, but speculators. And that is why the Chinese stockmarket has gone through record highs followed by a 35% crash. I guess that this effect has also infected Hong Kong, either through the Shanghai and Hong Kong interconnect or some other means.

Hanover Foods reported another underperforming quarter. So far in Q3 the company is on track to earn around $8M for the year. The company's operating margin was 3.3% versus 2.9% a year ago. But this is such a drop from 5% just a few years ago. I have no idea why this company has such low margins. The company also had almost no cash flow because it spent all the year's profits on inventory buildup. Again, I have no idea why. On the plus side the stock trades very low relative to book and at least is still profitable. Sooner or later it will turn around and improve its margins — or at least I hope. But in hindsight, I wish I never got involved with this stock.