There are some stocks that aren't as visible as those in mainstream sectors like industrial metals and minerals, or iron and steel. However, these stocks make sure that mainstream heavyweights are operating smoothly. One such stock is Puda Coal (AMEX: PUDA), a company that provides premium-grade cleaned coking coal to steel mills.
The basics
China-based Puda, which has an annual coal-washing capacity of 3.5 million metric tons, released its earnings this week that looked attractive for a small-cap company. The company, sporting a market cap of about $324 million, just registered impressive year-over-year revenue growth of 51%. While this might not mean a lot, it shows that the demand for coking coal was witnessing an exponential rise. And that does mean a lot.
No sign of slowing
China, the world's fastest-growing economy, has witnessed substantial growth in infrastructure and real estate projects, which naturally contributed to a rise in demand for steel. With the economy showing little or no signs of cooling down, there is no foreseeable reason this demand should drop in the near future.
Puda's annual revenue growth rate over the past five years has stood at an impressive 44.4%. The net margin rose by 7.2% from 2009, which is the highest recorded growth since the company went public in late 2005. Clearly, the company is picking up the pace in turning revenues into profits.
An issue to be dealt with
Let's look at free cash flow, which stands at $23.6 million. This value is far more impressive than L&L Energy (Nasdaq: LLEN), a company with a comparable market cap and business. For L&L, FCF stands at -$35.8 million. While a negative value is not bad in itself, the return on investment has yet to be seen. One word of caution here: The return on equity is 12.4%, below a Foolishly favorable 15%. Hence, the company has to work harder to generate higher returns in order to reward its investors.
In the long run
In the long run, there is room for much hope. Puda intends to diversify into coal mining and production as well. Any issues regarding supply will then easily be dealt with. This will help the company position itself to generate higher revenues. It makes business sense to diversify in the coal industry. L&L and Yanzhou Coal Mining (NYSE: YZC) have done just that.
This stock will improve as long as there is demand for coking coal in steel mills. It has been outperforming the market for the past two years. The business model looks promising, and there are no signs of a slowdown in this industry.
