Is Kandi Technologies Group Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Kandi Technologies (NASDAQ: KNDI  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Kandi's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Kandi's key statistics:

KNDI Total Return Price Chart

KNDI Total Return Price data by YCharts

Passing Criteria

Three-Year* Change 

Grade

Revenue growth > 30%

179.3%

Pass

Improving profit margin

(360%)

Fail

Free cash flow growth > Net income growth

223.5% vs. (825%)

Pass

Improving EPS

(721%)

Fail

Stock growth (+ 15%) < EPS growth

288.1% vs. (721%)

Fail

Source: YCharts. * Period begins at end of Q1 2011.

KNDI Return on Equity (TTM) Chart

KNDI Return on Equity (TTM) data by YCharts

Passing Criteria

Three-Year* Change

Grade

Improving return on equity

(376%)

Fail

Declining debt to equity

(57.5%)

Pass

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Kandi has been delicious for investors over the past three years, as share prices have nearly doubled -- however, the company's difficulty sustaining profitability has seriously hurt its score, which is an underwhelming three of seven passing grades here. The company's positive free cash momentum should encourage investors, but it's important to keep an eye on the income statement as well, and this has been moving a long way in the wrong direction in recent quarters. Can Kandi boost its bottom line and win over investors by 2015? Let's dig deeper to find out.

Kandi's shares have given up nearly all the ground gained after a near-double in January, and this massive drop (after a far more massive pop, to be fair) seems tied in no small part to CNBC talking head Jim Cramer's persistent drumbeat of negativity toward the Chinese EV manufacturer.

With such a large part of its float sold short, and with so little serious coverage of its actual business -- whether positive or negative -- Kandi's shares are constantly susceptible to massive moves. These moves have occurred with a gut-churning frequency, as Kandi's shares have oscillated by more than 5% in one direction or another 82 times since the start of 2013. Kandi has only had 72 trading days over the same time frame when it moved less than 1% up or down, making it something of a short-term trader's dream stock in a largely sedate market.

Part of the reason for Kandi's volatility is because no American analyst has yet stepped up to offer an opinion in one direction or the other. The general opacity of many Chinese-based businesses doesn't exactly encourage anyone on Wall Street to stick their neck out, and many analysts still remember with displeasure the wave of fraudulent Chinese shares that collapsed several years ago. What Kandi has reported has been generally very positive, as its top line is growing rapidly, and it has been the beneficiary of several Chinese EV initiatives, including a supply arrangement with the city of Hangzhou and an incentive program that will distribute nearly $10,000 in subsidies to Chinese EV buyers.

However, according to data compiled by Fool writer Leah Niu, Kandi's reports may be somewhat shady -- the firm that helped Kandi go public in the U.S. by reverse merger is currently being prosecuted by the SEC for stock manipulation schemes. With so little trustworthy information available investors should tread lightly around this highly speculative stock.

Putting the pieces together
Today, Kandi Technologies has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2014, at 11:49 PM, corstrat wrote:

    Sometimes past statistics don't tell the whole story.

    If you look at KNDI's 2013 10K, you will note that Gross Profit for 2013, was up 68.6% YOY from 2012; to 23% or about equal to TSLA. KNDI's significant increase was likely attributed to additional profits it is now booking due to its acquisition and integration of Younkang Scou, an EV motor, AC, Controller and Generator manufacturer. And remember, this was done without any "subsidies" yet in position. KNDI now makes over 85 of the key components of its EV's

    However, I assume for you to give them a "failing grade" for GP you used the Q1 reported numbers which had a one time anomaly whereby KNDI brokered a special advanced sale of EV batteries from an outside provider to the Kandi/Geely JV. While this transaction was profitable to KNDI, due to its quick riskless "flip", it only made around a million dollars on the $24 million transaction. Because of this transaction which booked the $24 million as part of KNDI's Gross, it caused an isolated one quarter knock down in the Q1 GP percentage to under 12%. But while the percentage went down, actual GP increased by 44% YOY. Expect Q2 GP to be around 25%.

    It is also noteworthy that you found other failing areas attributable to EPS, (One has to wonder how long Amazon's string of "failures" might have been using the same weighted parameters.) However, due to complex and confusing GAAP "Fair Value Accounting for stock and equivalents" rules, KNDI had to take a Non-cash charge of almost $13 million or just under .30 a share in Q1 simply because the stock had gone up over year end close. Had the stock gone down, these bizarre rules would have given KNDI positive GAAP income in the quarter.

    As of Monday June 30, almost 6 million warrants will have been exercised and/or expired since Jan. 1 leaving only about 1.3 million, mostly $15 warrants which expire this years end outstanding. So, once again, Q2 bottom line numbers, both GAAP and Non-GAAP will be much better with the hindrance of warrants mainly out of the way. Top line should be up over 300% YOY.

    Hopefully, you are going to be prepared to show Kandi's vast improvements when delivered in August with a follow-up article.

  • Report this Comment On June 29, 2014, at 11:51 PM, corstrat wrote:

    Sorry, that 85 should have been 85% of the key components.

  • Report this Comment On June 30, 2014, at 8:13 AM, mscommgroup wrote:

    There is really no point to analyze KNDI on the metrics you use above, Alex. The negative EPS is due to a tweak in their business model and their ramping up to focus on EVs. The previous operating profit that Kandi enjoyed previously was from their legacy business (go karts, ATVs etc). Secondly, you mention Leah Niu's article. Did you read the comments below the article? Did you see that the supposed issues she brought up are 4-5 years old and have not been substantiated? Don't get me wrong - I like your analysis approach when evaluating Micron or Qualcomm, but it shouldn't be used for micro cap growth stocks in disruptive technologies.

  • Report this Comment On June 30, 2014, at 2:02 PM, Gdubu wrote:

    There is full, Fool, and then fool disclosure. I think your article Alex falls somewhere between the latter two. First you use a comparative analysis that simply is not appropriate for a company like KNDI at its current stage of development. Then you add a touch of innuendo regarding matters arising from KNDI's reverse merger. Matters that may or may not have affected the company and if they did they are not matters of significance, especially today. You fail to mention that subsequent to a reverse merger every public company is subject to the same SEC reporting requirements. KNDI is a reporting company, files its documents on time, and has had several registration statements declared effective since becoming a public company. In fact, KNDI recently filed a $300 million mixed shelf registration, obviously anticipating a surge in growth. Sadly, like Leah Niu's before you, I feel your Fool article has failed the Fool standards.

  • Report this Comment On July 07, 2014, at 9:56 AM, Tgar13 wrote:

    http://finance.yahoo.com/news/kandi-technologies-group-annou...

    This tells it all and does not include local subsidies

    This is a real company , SEC has essentially signed off, they are making thousands of cars per quarter and soon will be making tens of thousands and they are making millions of dollars and soon hundreds

    If millions dollars

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