This will be the last post on Telestone Technologies (TSTC) for a while....
If you just fly by this website you might think I am all about technicals; that would not be true. I am a huge fan of secular growth stories and I try to focus investments on that end. However, as the years have passed - technical analysis seems to the main driver of many stocks, so I've moved to a much more hybrid model combining technicals and fundamentals. I still prefer companies I like the fundamentals of, and then simply apply technicals to them for risk control purposes (especially limiting losses).
I am saying that because I probably do not often discuss publicly some of the things I review on my own time in terms of fundamentals. That said, I have to respect the market, and if it disagrees with me on the baseline story, I will cut bait and and respect the power of the lemmings - since charts mean everything to the powers that be.
I went to review my thesis on TSTC this afternoon and with the caveat "as long as management is being accurate" I am even more bullish on second glance than first. [Dec 15, 2009: Telestone Technologies - Small Cap Chinese Telecom Equipment Maker; Some Services to Boot] Here is why - the company has a chance to equal the entire first 3 quarter's of EPS in the coming quarter alone.
***********************************
My math using the company's guidance: - keep in mind there are no analysts' estimates "to beat" and for a stock market populace who has become lazy and reliant on 3rd party analysts there is no one here to spoon feed them information (except myself)
Revenue for TSTC
last Q: $18.9M
First 3 Quarters; $38.9M
What should they report next Q? According to the last earnings report:
"Given our visibility into new orders, we are confident that continued strong demand in China will enable us to meet our $70 million in revenue guidance for the year," confirmed Han Daqing.
$70M - $38.9M achieved in first 3 quarters leaves $31.1M for the fourth quarter. That would be 65% sequential growth over 3rd quarter - massive.
*************************
Next, we need to convert that to an earnings per share figure. I am going to do "simple math" here - lazy, back of envelope analysis if you will.
To do this we simply look at net income percentage... generally you have gross margin (what it costs to make the product or service directly) and then your overhead costs also called SG&A. Your gross margins should stay pretty consistent quarter over quarter, but as your revenue expands your overhead costs (accountants, IT people, management, sales) won't explode higher in the near term. Obviously in the long run if your business doubles in size you need more of these folks, but in a 3 month period we should not expect a hiring binge. All those comments above take us to an operating percentage. Then there are corporate activities such as taxes which takes us to a net income percentage.
Net Income % for TSTC
last Q: 22.2%
First 3 Quarters; 18.8%
So true to form, as revenue expanded the net income percentage improved as similar overhead costs were spread over a larger revenue base.
******************
Obviously we don't know exactly what net income percentage in Q4 will be. We can however create a band - from conservative to mildly aggressive.
A) Conservative... somehow despite a huge surge in revenue net income percentage actually falls (perhaps a weird tax hit or a huge hiring binge happens) Let's say net income percentage falls to 20% in Q4. This would be an unlikely scenario but lets bill this as "worst case".
We will take our $31.1M in revenue x 20% net income = $6.1M net income
There are only 10.4M shares
Hence we come to $6.1M / 10.4M shares = $0.60 EPS.
That is 60 cents in 1 quarter for a company that had 71 cents in the first 3 quarters (41 cents of which came in the last quarter)
B) Less conservative... I would not even call this an aggressive scenario, it simply assumes some slight improvement in net income percentage from 22.2% in Q3 to 23.0% in Q4. With such large revenue growth quarter over quarter, I'd be surprised if we did not see an improvement such as this.
Take the $31.1M in revenue x 23% net income = $7.15M net income
$7.15M / 10.4M shares = $0.69 EPS.
****************************
So my band of Q4 EPS is 60-69 cents EPS in Q4, and I don't consider the 69 cent figure to be based on any aggressive assumptions.
This for a company that reported 71 cents for the first 3 quarters of the year.
Either figure places full year EPS in the $1.30s. For a stock at $20. Growing well over 100% year over year.
I'll let you P/E aficionados do the math from there.
Does that mean the stock can't drop $4 tomorrow? No - it can do anything it wishes... but it sure won't be based on fundamentals. Of course the main risk is the management does not come through on their guidance. Have I been let down by smaller Chinese companies management in the past? Too many times to count the past half decade - so that is something you always need to be cognizant of. But it happens in American companies just the same...
Author's Disclosure: Long Telestone Technologies in fund in fund and personal account
original post
No comments:
Post a Comment