Is Puda Coal a Red Hot Investment?
Puda Coal, Inc. [[PUDC.OB]] shares more than doubled over the past two months, but many investors believe this coal stock remains undervalued. The coal industrial coal supplier trades at just 2.46x earnings, with 56% earnings growth year-over-year, while China’s economic stimulus plan promises to drive growth in the future. However, other investors remain cautious given the company’s recent earnings report and the generally sluggish global economy.
Puda Coal supplies metallurgical coking coal to the Chinese industrial sector, which primarily consists of steel producers. Unfortunately, the global economic downturn has led to less building projects and therefore less demand for steel across the country. This led the company to report lower first quarter revenues and net income of $49.7 million and $0.02 per share, respectively. If this sluggishness continues, then the company’s valuation could become less attractive.
China’s $2.65 trillion economic stimulus package contains a wide array of economic revitalization actions in order to spur growth. Among other things, the package includes a $586 billion package of spending through 2010 on public housing, railways, highways, airports, power grids, and earthquake-related reconstruction work. These building projects all require steel and should help increase demand down the road for coking coal.
Puda Coal also announced plans to enter the coal mining industry in order to significantly enhance profitability and shareholder value down the road. Recently, the company announced that it acquired an 18% interest in mining company Jianhe Coal. The ownership stake in Jianhe Coal, and the mine’s close proximity to their Linshi facility, should provide the company with higher margins and increased operational efficiency.
Finally, Puda Coal has a robust balance sheet and a ton of cash on its books. As of April 2009, the company had $24.4 million in cash and $69.5 million in working capital. Given that the company trades with a market capitalization of just $41.32 million, this suggests that investors are able to purchase the company itself (ex-cash) for just $16.92 million or $0.15 per share. With earnings per share of $0.16 last year, this is an incredible value by any measure.
In the end, Puda Coal’s stock appears to be substantially undervalued by many measures. While the economic crisis may dampen results in the near-term, many investors are confident that China’s economic stimulus package and the company’s mining initiatives could help improve results.
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