Golden Green Enterprises Limited (CHOP): Ripley’s Believe it or Not

Robert Ripley

CHOP reported stellar Q3 numbers of $59 million in revenues and $.29 EPS, so through 9 months of 2009 they earned $0.82, with expectations of $1.02 – $1.07 EPS for FY 2009.  Gross margin increased 440 basis points to 30.6%.  AND THE STOCK IS DOWN.  The company did state that Q4 Revenue/EPS would be $40-50 million and $0.20 – $0.25 range as the company does have some “lumpiness” (not seasonality) with some of their order flow as well as scheduled maintenance during the quarter, but they said several times they expect Q4 to be towards the upper end of that range .  CHOP also stated several times that their growth is only bound by their production capacity, which is scheduled to double by 2011.  The new capacity that is being added is going to be used for higher margin business, which will push gross margins closer to 40% in 2011.  Construction on new factories have already started with the first ones coming on line in Q3 2010, so one can expect a large bump up in earnings and gross margin at that time.  Overall the financials are outstanding even though the stock is down post Q3 report.  CHOP is currently trading at 5x FY 2009 EPS Guidance, growing gross margins, with expected capacity upgrades in Q3 2010.  My guess is FY 2010 revenues increase 20% in 2010 with net income increases 30% versus FY 2009 with even more substantial top and bottom line growth occurring in 2011.

Q3 2009 Highlights:

    Third Quarter 2009 Highlights

    -- Revenue increased 6.0% to $59.3 million from $55.9 million in the third
       quarter of 2008
    -- Gross profit increased 23.8% to $18.2 million from $14.7 million
    -- Gross margin increased 440 basis points to 30.6% from 26.2%
    -- Operating income increased 18.9% to $16.2 million from $13.6 million
    -- Operating margin increased 300 basis points to 27.3% from 24.3%
    -- Net income attributable to common stockholders increased 115.9% to
       $11.5 million, or $0.29 per diluted share, from $5.3 million, or $0.18
       per diluted share

Now the fun part: I was on the CHOP Q3 CC that took place 8AM Friday morning, and it was like Ripley’s believe it or not.  I’ve been on a few hundred quarterly conference calls in my day and this one was in my top ten of all time (good and bad).  The company presentation was very good because the numbers were excellent, and then came the question and answers portion of the call.  I would say 70% of the questions were from disgruntled PIPE participants that were obviously looking to trade out of the stock as soon as possible.  They kept ragging on the company about how the business is really “seasonal” and the company kept reiterating it isn’t, and that it is just “lumpy” at times.   It was literally an amateur hour type performance from many “professionals” asking the same questions.  Acting all angry, acting worse than children, some were having bigger hissy fits than most 2 year olds.  During this time I’m thinking to myself, “Are you really complaining about owning a stock trading at less than 5x fully taxed fully diluted FY 2009 EPS?” The company handled it pretty well all in all as they stated their guidance for the year hasn’t changed from when they presented their story to wall street (ie $42 million in net income for FY 2009), and that they expect margin expansion, and sequential growth to occur again in Q1 2010 (vs Q4 2009) and even more substantial growth to occur in second half 2010/2011.  But you see no one even asked any real questions because most of the institutions on the call were acting like children, so I bought a few more of these children’s shares at $5.10 and $4.85.  It may trade lower due to its shareholder base of children, but my guess is some real institutions will find CHOP and it will in time trade at much more normal multiples.

Disclosure:  LONG CHOP