Gulf Resources: Solid Growth, Undervalued
Gulf Resources, Inc. (GFRE) may not be as well known as The Dow Chemical Company (DOW) or Eastman Chemical Company (EMN), but it has carved out a profitable niche in the oil and gas exploration industry and appears to be substantially undervalued.
Gulf Resources, Inc. [[GFRE.OB]], which manufactures and trades bromine and crude salt along with chemicals used in oil and gas exploration, is a profitable China-based chemical company with double-digit growth rates and a cheap price-earnings multiple of just 8.5 times last year’s earnings, making it substantially undervalued in the eyes of many value investors.
A Solid Business Model
Last quarter, Gulf Resources saw net income of $8.97 million on revenues of $29.59 million, representing growth of 42% and 24% respectively versus the same quarter a year ago. However, the real earnings story is in the company’s cash flow from operations, which increased from $9.33 million to $19.26 million over the same period. Finally, the company also maintains a solid balance sheet with $37.96 million in cash and a current ratio of 2.17.
The majority of Gulf Resources’ growth was attributable to the chemical products segment, which saw its revenues jump approximately 57% during the quarter. The increase was primarily the result of increased sales of their new friendly additive product, solid lubricant and polyether lubricant, which are used in oil and gas exploration and introduced in Q4 2008. The company plans to continue this growth by expanding production in this segment.
A Great Value Play
Most investors prefer to assign earnings multiples based on a company’s long-term growth rate. Those using the price-earnings to growth ratio believe that companies are fairly valued when their price-earnings ratio is equal to their growth rate. Gulf Resources has posted double-digit growth rates, but maintains a price-earnings ratio of just 8.5x, making it appear undervalued.
However, Gulf Resources indicated in its 10-Q filing with the SEC that it may need to raise additional capital in order to fund its ongoing program of acquiring unlicensed bromine properties. It expects to raise those funds through the issuance of additional shares of equity securities, which means investors should be mindful of dilution when estimating value.
Key Risk Factors
Despite its solid performance, Gulf Resources also poses a few added risks for investors. First, the company sells a substantial portion of its products to a limited number of customers, with its two largest customers accounting for 24% of its sales. Meanwhile, it purchases around 28% and 27% of its raw materials from two suppliers, adding to concentration risk.
Gulf Resources’ stock also trades on the OTC markets, which means that it faces less regulatory scrutiny than a nationally listed company. The stock also has limited trading volume, which could make it more difficult for investors to purchase or sell the stock at a price close to the current market price, compared to traditional nationally listed securities.
Conclusion
Gulf Resources is a strong company that continues to perform well in a growing niche industry. While the stock trades at a cheap valuation, investors should be mindful of dilution and risk factors. But in the end, the company offers a compelling value play in unique industry.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com