It's pretty simple really.
You sell products, you bring in revenue. Subtract whatever cash was
spent on those products (cost of goods sold) and you have gross
profit. The larger the gross profit, the moreearnings are left over
once all the other day-to-day expenses are paid.
For many companies, the cost of goods sold can really eat into the
. Think of the mountains of grains and sugar that cereal maker
has to procure. The company took in $12.6 billion in revenue last
year, but spent more than $7.2 billion (57%) on raw ingredients
that went into all those boxes of Rice Krispies and Frosted Flakes.
Even firms with smaller budgets have to cope with volatile price
fluctuations or shipment delays that can create havoc on production
But one upstart Chinese company has decided to cut out the
middleman almost entirely.
Yongye International (Nasdaq: YONG)
is an up-and-coming player in the green agriculture movement. The
firm sells organic crop nutrients and animal feed supplements
derived from lignite coal. Lignite coal is the most expensive input
in the firm'sbusiness model ,accounting for about 50% of its
So rather than continue paying a fat mark-up to its suppliers,
Yongye bypassed them entirely by buying its own lignite coal mine
earlier this year. It also just cut the ribbon on a new
manufacturing facility right next door to the mine, which will soon
be rolling out 30,000 tons of plant and animal nutrient each year.
will have a dramatic impact on Yongye's profitability -- much like
a lemonade salesman planting a grove oflemon trees in his backyard.
Management doesn't give us any specifics, but a +15% to +20%
expansion in gross margins is reasonable. With sales already
should soar even more in the near future. Not that the Yongye needs
any help in that department. Revenue doubled from $46 million to
nearly $90 million last quarter, which helped
quadruple to $24 million, or $0.54 per share.
Of course, numbers are just numbers -- it's the catalysts driving
them that matter.
In a recent article about the wheat shortages in Russia, I
mentioned that there will be an estimated 1.1 billion more mouths
to feed by the end of the decade. That kind of population growth is
what is partly fueling surgingcommodity prices. [
Read the article here
And in this case, Yongye is in an enviable position because many of
those mouths will be in China.
The firm's Shengmingsu brand nutrients are proven to shorten
harvest times and boost crop yields, enabling farmers to get the
mostproductivity out of their land. Cucumber output, for example,
can rise as much as +22% -- and get to market nearly two weeks
Most of China's rural farmers rely heavily on local stores for
supplies, and Yongye is making the most out of this distribution
channel. The firm negotiates with these independently-owned stores
to prominently display (and push) the Shengmingsu brand. By the end
of 2010, Yongye will have converted 23,000 stores, a powerful +152%
increase for the year. And the company is just now spreading its
footprint outside its core territory in the Hebei region of
Action to Take -->
Yongye's shares, at $8, are trading at just 15 times trailing
earnings, fine for a slow-moving giant, but highly enticing for a
young company that's delivering racy triple-digit earnings growth.
The stock can be had for a
ratio of just 0.2 -- one of the most discounted valuations you'll
Looking ahead, the company has several big-picture factors working
in its favor, not the least of which is the fact that Chinese
growers, which have just one-third as much arable land as other
countries per-capita, must feed one-fifth of the world's
I see the shares climbing above the $10 mark in the next 12 months,
which would represent gains of +25% or more from current levels --
and even more in the long-run.
-- Nathan Slaughter
Nathan Slaughter's previous experience includes tenures at
AXA/Equitable Advisors and Morgan Keegan. In addition, he's
earned Series 6, 7, 63, & 65 certifications. Read more...
Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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