Emerald Dairy Breaks Out, Fundamentally Strong
Emerald Dairy Inc. [[EMDY.OB]] shares broke out from their trading range on higher-than-average volume amid bullish speculation on the Chinese dairy market. Meanwhile, long-term investors remain convinced that the company is well-positioned to grow going forward with new production facilities set to come online and a new organic milk label going into production. So, is now a good time to get into the growing Chinese dairy industry?
Last year, Emerald Dairy reported net income of $2.31 million on revenues that surged 50 percent year-over-year to $44.32 million. Gross margins also improved from 35.6% to approximately 40% for the year, but higher operating expenses and income taxes led to sharply lower net income and earnings per share of $0.08 compared to $0.15 a year earlier. As a result, many long-term investors are cautiously optimistic about future prospects.
It helps that Emerald Dairy is well-capitalized with a robust balance sheet. The company reported cash and cash equivalents of approximately $7.34 million at the end of 2008 with current assets of $18.71 million. As a result, the company will likely be able to fund its future operations without taking on substantial new debt or issuing a significant number of shares. Meanwhile, the company showed no long-term debt and current liabilities of just $8.25 million.
The Chinese dairy market is valued at over $13 billion and is expected to grow at a rate of 15% per year over the next few years. Meanwhile, the Chinese government has recognized the importance of the industry as milk and dairy products have gradually become an accepted daily necessity in the life of Chinese people. However, the market does have some problems with tainted products causing deaths in the past.
Over the next three years, Emerald Dairy plans to focus on rapidly expanding its production capacity in order to keep up with growing demand for its products. This could result in substantially higher capital expenditures and operating expenses, but the increase in volume should help drive growth going forward. The company’s latest production facility is expected to go online in the third quarter of fiscal 2009 to produce 9,000 tons of milk powder per year.
In the end, Emerald Dairy has strong potential but long-term investors may want to wait for a cheaper valuation before initiating a position. Currently, the stock is trading for over 22x its 2008 earnings after moving up over 70% during today’s session. Meanwhile, short-term traders that got in at a good price may want to consider rolling into long-term positions given the company’s fundamental strength and potential.
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