Hi. My name is Rich. And I am a Yongye International (Nasdaq: YONG) skeptic.
(Hi, Rich!)
It's been nearly a year since I wrote a skeptical column on Yongye, however. The last time I wrote about this Chinese pharaoh of fertilizer -- three weeks ago -- I suggested it might finally be time to buy the stock. And like the proverbial stopped clock, it appears I've been proved right twice.
Yongye reported first-quarter earnings last night, and, as we've come to expect, the numbers were fabulous:
- Sales more than doubled to $50 million.
- Gross and operating profits climbed in tandem, up 97% and 101%, respectively.
- Net profits increased 60%, while "adjusted" net -- the number Wall Street focuses on when making its earnings estimates -- nearly tripled to $0.27 per share (beating consensus expectations of $0.18 with a stick).
Not that I care about any of that.
The trouble with Yongye
The trouble with Yongye, you see -- and the trouble with a lot of Chinese small caps -- is that a lot of people don't trust their numbers. Not even when calculated under GAAP. Not even when audited by a "Big Four" accounting firm. That's one reason companies like Yongye and China Green Agriculture (NYSE: CGA) languish at single-digit price-to-earnings ratios, while firms like Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT) enjoy more robust P/Es of 14 and 24, respectively.
While I don't necessarily agree the discount is warranted, I do acknowledge the concern. That's why I hedge my bets on the "can we trust 'em?" question, and skip right over Yongye's headline numbers to count the cash instead. Once again, I like what I see.
Confirming the impression we got last quarter, Yongye's cash flow statement once again showed strong cash-profit generation. Operating cash flow grew more than 1,200% year over year, to $6.6 million. Subtract $1.1 million in capital spending and Yongye generated $5.5 million in real free cash flow. Thus, in one quarter's time, Yongye has effectively doubled its trailing free cash flow. It's now generating $11.5 million in annual FCF, and growing at a brisk clip.
Foolish takeaway
Ordinarily, that wouldn't be enough to persuade me to buy the stock -- not at Wall Street's projected 15% growth rate. But it seems to me Yongye is growing a whole lot faster than Wall Street gives it credit for. If I'm right, Yongye just might be one of those "wildly mispriced" Chinese small caps we've been looking for.
Are you looking at Yongye? Make it easy on yourself. Add the stock to your watchlist and keep up to speed on developments at this company.
