American Oriental in Neutral Lane - Analyst Blog
November 30 2011 - 5:45AM
Zacks
We reiterate our Neutral
recommendation on American Oriental Bioengineering,
Inc. (AOB) with a target price of $0.75.
The company recently reported its
financial results for the third quarter of 2011 in November.
Adjusted earnings per share during the quarter came in at 7 cents
per share, 2 cents above the Zacks Consensus Estimate. Earnings
were hurt by lower revenues, which declined 41.1% to approximately
$54.0 million. Weakness in the manufacturing segment (down 43.9%)
was responsible for the slide in revenues. Revenues were well below
the Zacks Consensus Estimate of $70 million.
American Oriental earns revenues
from two operating segments – manufacturing and distribution. While
the manufacturing business accounted for approximately 91.1% ($49.1
million) of the company’s total revenue, the distribution business
– Nuo Hua generated the remaining revenues of $4.9 million. (Read
our full coverage on the earnings at Revenues Decline at American
Oriental).
We note that the company operates
in a highly competitive environment. The excessive competition
confronting the company’s products concern us.
Moreover, over the last few years,
American Oriental’s operating margin has declined steadily. From
32% in 2007, 24% in 2008, 20% in 2009, the margin hit a low of
approximately 10% in 2010. If this declining trend continues, the
company’s bottom-line will be severely affected.
However, we note that the
pharmaceutical industry in China is growing rapidly. The growth is
attributable to the government’s efforts to improve the healthcare
infrastructure coupled with its goal to achieve near-universal
health coverage. We believe prescription drug sales will continue
their growth trajectory as China aims to reform its health care
sector to incorporate unaddressed rural markets. Management
believes that by 2020 the entire Chinese population will have
access to safe, effective and affordable healthcare services. The
rapidly growing Chinese pharma market provides a lucrative
opportunity to American Oriental to increase its revenue.
Further, American Oriental believes
in the strategy of growth by acquisitions. The company has
completed multiple acquisitions in the past few years which have
expanded its product portfolio and contributed to growth. For
example, with the acquisition of Nuo Hua Investment Company Ltd. in
2008, the distribution of pharmaceutical products became a part of
the company’s operations. American Oriental currently distributes
multiple pharmaceutical products. We believe that such profitable
acquisitions in future will aid the company’s growth.
We prefer to remain on the
sidelines till further visibility is obtained on the growth of the
Chinese pharmaceutical industry and its impact on American
Oriental.
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