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Dilution Lurks at AOB

http://www.fool.com/investing/small-cap/2008/08/13/dilution-lurks-at-aob.aspx

Brian Lawler
August 13, 2008

On Monday, Motley Fool Hidden Gems pick American Oriental Bioengineering (Nasdaq: AOB  ) released some stellar year-over-year growth numbers. But investors should be wary of the growing share count fueling that performance.

In the second quarter, AOB posted a 74% revenue increase and a 43% jump in net income versus last year. While nearly any company would celebrate these sort of top and bottom-line growth rates, it's important to keep in mind that AOB primarily grows its health-care-supplements business through acquisitions -- specifically, acquisitions funded by dilutive equity financings.

If a company is furiously selling new shares to buy its growth, even a 100% increase in net income from one period to the next can leave shareholders with a smaller piece of the earnings pie. That's partly why you see AOB's earnings per share increasing more slowly than its revenue and net income's torrid pace:

Quarter

Net Income

Net Income Growth (YOY)

Earnings per share

EPS Growth (YOY)

Q2 2008

$13.9 million

43%

$0.18

20%

Q1 2008

$9.4 million

46%

$0.12

20%

Q4 2007

$15.3 million