Chinese infant formula provider Feihe International (
ADY
,
quote
) put out one of those alarming "we don't comment on unusual
trading activities" statements this morning -- the kind that make
you wonder what's gone horribly wrong.
[caption id="attachment_56935" align="alignright" width="200"
caption="With an 890% sales gain, Astrobaby could be healthy for
babies and investors."]
[/caption]
On closer examination, though, the unusual activity the company
won't comment on seems to be good news.
After bumping along at about $3 per share for most of the last
year, the company's stock has risen abruptly, trading at double its
normal volume on April 17 and closing yesterday at $4.84. Feihe has
made no announcements to ignite investor interest, and there was no
news about the company in the week preceding the rise. So what's
going on?
There's no smoking gun to explain the investor interest, but
Feihe shows several signs of being undervalued. The company grew
steadily in 2011, with a 42.1% gain in sales in the 4th quarter and
a 14.2% increase for the year.
A lot of that gain came from the company's AstroBaby super
premium infant formula, which exploded by 890.2% in Q42011.
The company lost money for the year, but attributed the loss to
long-term liabilities, discontinued operations, and a move out of
the wholesale milk powder market. Gross profit was $112.3 million,
for a gross margin of 38.3%, and operating income was $9.6 million,
a substantial improvement from 2010's operating loss of $23.3.
Feihe has been steadily retiring its debt, so those long-term
liabilities may not be weighing down the balance sheet for much
longer.
China is a nation obsessed with its children, and companies that
can promise safe, reliable nutrition have a strong position in the
marketplace. Unlike many Chinese infant formula providers, Feihe
was found to be completely safe during 2008's adulterated milk
scandals, and it's maintained a good reputation when even prominent
international companies like Abbott Labs (
ABT
,
quote
)
have been questioned
.
None of this completely explains the rise in ADY, or a similar
gain that happened near the end of January. But there are clearly
some investors who think the company has a bright future ahead, and
there are reasons to believe those investors are right.
