Your definition of "solid" may vary when you're running a small-cap business that depends heavily on orders from the Chinese government.
China Security & Surveillance Technology (NYSE: CSR) CEO Cushen Tu seems to have adjusted his expectations of smoothness. His company delivered earnings of $0.23 per share (not per ADR -- this stock is listed directly on the NYSE board) in the second quarter on $168 million of sales. That's 77% and 19% growth, respectively. If that's any indication of how China Security's ongoing operations are rolling, that's just great. Keep doing what you're doing and you'll get rich.
But that's not exactly what's going on. China Security's results are lumpier than dumpling soup, for many reasons:
- The security systems market is still small in China, and so are all of the major competitors.
- 55% of China Security's business comes from government orders, and the rest from the corporate sector. This company depends on the whims and order patterns of a handful of large customers.
- International interlopers such as Honeywell (NYSE: HON) and General Electric (NYSE: GE) are putting pressure on China Security by offering competitive installations these days.
- Once a system is installed, that's pretty much the end of the order. China Security does not make any significant money from system monitoring or support contracts.
As a result, both sales and earnings are jostled about like a couple of stowaways on a box car headed for Topeka. Check out the past two quarters for a little taste:
|
Metric |
Q1 2010 |
Q4 2009 |
|---|---|---|
|
Revenue |
$120 million |
$183 million |
|
Diluted EPS |
$0.05 |
$0.38 |
The stock is dirt cheap -- about five times trailing earnings after today's report -- but you're also buying into a rather unproven commodity. A cross-marketing agreement with equipment supplier Alvarion (Nasdaq: ALVR) could help in the long run but hasn't done much to date. Should China Security sign similar pacts with other major electronics currently supplying the company like Sony (NYSE: SNE) and Panasonic (NYSE: PC), then the Chinese-market reach of this young pup could grow dramatically. It's who you know, not what you know -- you know?
Until that happens, this will continue to be a rickety ride. I can certainly imagine the security systems market taking off in China as the players in it start to mature, but then I can also see China Security drowning in a rush of start-up competitors. This company isn't big enough or strong enough yet to stave off that kind of threat. It's a speculative buy at best.
But China Security is a five-star CAPS stock with a 98% approval rating from more than 1,500 CAPS members. So what am I missing that makes China Security so goshdarn popular? Straighten this out in the comments below.
