Thursday, May 20, 2010

L&L Energy (LLEN) Announces Impressive Fiscal 2011 Guidance; Market Yawns

It is always remarkable how the market can shit from "all news is good news" for months on end, to "most news does not matter" as we currently are facing. In the "student body left" trading environment that has come to grip the market the past 3 years, individual stories tend to mean less and less and large macro events or what ETF your stock exists in (and if that sector is in favor) seem to be all that matter 90% of the time. While that provides "opportunities" for those with a very long time horizon it is quite frustrating.

L&L Energy (LLEN) is a smallish Chinese coal oriented company (not just production of coal) which I highlighted mid April [Apr 14, 2010: Bookkeeping - Starting L&L Energy] At heart, I am a "growth at a reasonable valuation" type of investor, so this type of company is in my strike zone. But as I pointed out in that post there were risks:

  1. It's a "small cap Chinese" name so can rise or drop 10% on any session for no particular reason
  2. I doubt the investor base is 'strong hands'.
  3. Unlike the US China is tightening monetary policy so any day there is worry about a slowdown in the Chinese economy the stock has a chance to be crushed.

#1 and #3 especially played out, it is actually amazing to see the Chinese market crushed on "future potential monetary tightening" for 2 months straight. It almost makes me wonder if China will begin to rally once the actual tightening begins in earnest! (sell the rumor, buy the news?) - thus far China has just taken relatively superficial steps.


Anyhow, this is not a well followed company and Tuesday L&L Energy put out preliminary guidance for fiscal 2011. (the company just reported fiscal Q3 2010 in April so it's not on a traditional schedule) The guidance appears excellent although to some degree the price of coal (only *part* of their business) is out of their hands, hence the forecast is variable.
  • The Company expects a revenue projection of $218 million for the 2011 fiscal year ending April 30, 2011 which represents growth of approximately 102% over previously released 2010 guidance of $108.1 million.
  • We expect net income after tax and minority interest to grow from an estimated $28.1 million in 2010 to $46.7 million in 2011 for an increase of 66%.
  • The Company is projecting earnings per share of $1.33 for 2011, an increase of 41% over previously released 2010 guidance EPS of $0.94 for the fiscal year 2010.

(please note in a perfect world the bottom line would be growing nearly as fast as the top line, hence these figures - while very good, are not as perfect)

So we have revenue growth of 102%, net income growth of 66% and EPS growth of 41%. The market took the stock up Tuesday (into key resistance), and then the news was forgotten by yesterday.

I don't know if that $1.33 projection for fiscal 2011 is valid, who knows what happens in a global slowdown 2.0 scenario. But if we reduce it by 15% it is still $1.13 EPS. For a stock that now trades below $10. So the stock is quite cheap - fiscal 2010 estimates are $0.94, and the Q4 2010 number should be reported in July, at which time it turns over to fiscal 2011. But I suppose for now, this name is like many others and hostage to the greater market - fundamentals or no fundamentals.

More color on the guidance:
  • As a result of a drought in southwestern China, demand for coal in China is extremely high as coal-fired power plants are being utilized to offset decreases in hydropower output.
  • Coal inventories at Qinhuangdao, China's largest coal port have dropped significantly the last two months. Increased Chinese coal import activity along with greater worldwide coal consumption have recently driven up prices. Coking coal, an essential material in steelmaking, has also seen recent high levels of demand and subsequent price increases.

I'll be very interested in rejoining the position if it can recapture the 50 day moving average...or I suppose if it drops way down to the 200 day moving average in the mid $7s. Currently it sits in no man's land on the chart.

L & L Energy, Inc., through its subsidiaries, engages in coal mining; clean coal washing; and coal consolidation, coking, and wholesaling businesses in the People's Republic of China. The company's coal products include raw coal, washed coal, and metallurgical coke.

No position

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