Tuesday, July 21st, 2015
If you’ve been watching or listening to the news, you’ve been hearing a lot about Greece and a little bit about China.
Since 2010, I have been saying that China would be the next big thing to blow up on us. I estimated that it would happen about 2017.
Its stock market has been up and down dramatically, and while some may think it is a great time to invest in China, here are some facts that concern me:
Currently, its market has recovered some of the losses over the past year and is still in positive territory.
But the Chinese market, known as the Shanghai Composite Index, currently trades for about 80 times earnings. Our current market trades at about 17 time earnings.
If you go back to 2007 through 2008, the Shanghai dropped by 70 percent and barely moved for six years. There's a lot of movement in Chinese stocks, but the risk is great.
One other thing that was shocking was China’s debt, estimated to be about $28 trillion, based on mid-2014 numbers. All its building and construction was leveraged, which brought the 2007 debt of $7 trillion up to current levels.
China’s debt now stands at roughly 282 percent of its gross domestic product.
So for those of you who want to invest in a Chinese company, you may consider the hot IPO of last year known as Alibaba Group Holdings Ltd. (NYSE: BABA). It operates as an online and mobile commerce company and is considered the Amazon.com of China.
I was actually happy to see that the price-earnings ratio over the past 12 months was 50.4. Don't think for a second that this is a good price-to-earnings ratio, but it is better than where the Chinese market trades.
Since Alibaba’s initial public offering last September, the stock price has traded as low as $76.21 and reached a high of $120 per share just a couple months after the release of the public offering.
The stock has fallen more than 30 percent to about $83 per share, which is why the PE ratio is now back to 50.
Looking at what investors pay for the sales at 16.7 versus the industry at 1.0 should worry investors about such a high valuation.
The price to book value is 13 versus 10.7, which is not a great number but it is not too bad.
What is frightening is the price to cash flow of 44 compared with the industry at 17.3. If that doesn't scare you, then you are not looking at the fundamentals of the business; you are a gambler who looks at just the stock and hopes it will be higher on the short term.
What excites people about this company is the potential sales growth, which year over year of the past 12 months has increased by 45.1 percent, almost 10 times the industry average of 5.2.
It is nice to have a company that grows its sales but investors need to make sure there are earnings to support the company, not just sales.
Alibaba grew its earnings by a paltry 1.5 percent when the industry grew its earnings at a much higher 5.5 percent.
The company appears to be very liquid with a current ratio of 3.6, well above the industry average of 1.4. This high current ratio is helped in part or mostly by the cash and short-term investments of $126 million.
It appears that the company issued an additional 300 million shares, which could account for the big increase in the cash position.
A lot of cash does look good on the balance sheet, but investors should remember that when the company issues more shares to shareholders, it will dilute their current holdings.
The company has total debt of $52.6 million and its debt to equity is 34.6, well below the industry average of 97.3.
So the company’s financial strength looks very good.
The company also has a very high net-profit margin of 34 percent, compared with the industry at 1.0 percent. This helps its return on equity, which checks in at 27.6, more than three times the industry average of 7.3.
Looking forward, the earnings-per-share estimates are $1.67 for the year ending March 2016, climbing to $2.55 for the year ending March 2017.
Breaking down the analyst estimates for March 2017, I see a low estimate of $1.89 and a high estimate of $3.73, based on 31 analysts.
That is a wide range of 97 percent, which does not give me much comfort in the $2.55 earnings for March 2017.
Moving forward and still using that high number of $2.55 in our normal forward PE of 16.5 would yield a target selling price of $42.80.
It's obvious that at about $80 a share, I believe the company is way overpriced and the stock is not a good buy.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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