But dig a little deeper and look where the company is headed. You'll see why investors are being cautious about the stock, valuing the company at just less than five times last year's adjusted earnings.
In its quest to become the Johnson & Johnson
The company is guiding for 30% revenue growth this year, but most of that increase will come from the distribution center it purchased in October. Organic revenue growth will be 11%, while net income before interest is expected to grow less than 4%. Interest expenses should be higher this year, because AOB sold convertible notes in the middle of last year. After taking that into account, I really don't see any growth in earnings at all this year.
How does 30% projected revenue growth line up with flat earnings? It seems likely that the company will increase R&D expenses as an investment in its future. Management indicated that the company will launch several products this year, and at least 10 new ones next year. It's also starting a clinical trial to test one of its Chinese medicine compounds for urinary incontinence -- an idea of dubious merit, in my book. Clinical trials are expensive, and while the drug may be effective, if it ever did reach approval in the U.S., American Oriental Bioengineering would have to face formidable competition. Pfizer
It would seem wiser to license out the drug than to invest in expensive clinical trials. Perhaps that's the company's strategy after completing a relatively cheap phase 1 trial, but AOB has never been very forthcoming with its plans.
I want to like American Oriental Bioengineering -- there's a lot of potential in China, and it's darn cheap right now. But it's going to have to show that it can translate that top-line growth into increased earnings before I'll jump on board.
Further Foolishness from the opposite side of the globe:
GlaxoSmithKline and Johnson & Johnson are Income Investor picks. Pfizer is a current Inside Value recommendation and a former Income Investor pick. The Fool owns shares of Procter & Gamble and American Oriental Bioengineering, which is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletters today, free for 30 days.