|Why Cleantech Solutions Should Be Trading At $19 |
Wall Street loves a turnaround story. Investors who identify turnaround stories at an early stage are ultimately handsomely rewarded. I believe the Street will soon take notice of the massive turnaround currently taking place at Cleantech Solutions (CLNT), a fallen angel that once traded at a split-adjusted price of $140, now trading in the mid $3s. As its name implies, the company manufactures metal components and assemblies used in clean technology industries. The shares should trade many multiples higher in the near-term as investors learn of this turnaround, most recently evidenced by the phenomenal last quarter the company just reported.
Cleantech Solutions reported a mind-blowing quarter just last week. The full transcript of the conference call can be accessed here, courtesy of Seeking Alpha. Cleantech reported earnings of 88 cents, a 91% improvement year-over-year. Annual revenue growth came in at a very impressive 48% yr/yr and over 35% quarter-over-quarter. These numbers are all the more astounding when taking into account the lackluster quarters posted by the vast majority of companies across the spectrum last earnings season, particularly those involved with clean technology. Gross margins also improved dramatically for Cleantech from the prior year. This was the best quarter the company has ever reported, and the outlook looks just as bright (see below), yet the stock is 98% off its all-time highs. This is a disconnect the Street cannot ignore for long.
Catalysts for Shares
Judging by the outlook offered by Cleantech management, investors can be assuaged that Q3 was no fluke, and that the turnaround is full-fledged, legitimate, and quite powerful. CEO Wu states, "We anticipate strong growth potential in 2013 with the expected launch of our new after-treatment equipment, which is in the late stages of research and development." Moreover, Cleantech has confirmed that it has already booked at least two confirmed purchase orders signed soon after Q3 ended, and should be reflected in next quarter's top-line.
Cleantech Solutions currently trades at a P/E ratio of less than 2, and a price-to-sales ratio of less than 1 to 5. A company like Cleantech, consistently profitable and cash flow positive, which reports a blowout quarter and issues a bullish outlook, should earn a premium multiple, certainly not the steep discount the market is currently assigning to it. Cleantech has earned $1.9/share in the past twelve months. Using a very conservative, below-market, trailing multiple of 10, CLNT should be trading at $19. I could make an argument for much higher prices using other valuation metrics; this is using extremely conservative assumptions.
As the company is engaged in clean technology and is based in China, Cleantech business may naturally be affected by changes in government regulations, tightening credit, reductions in tax subsidies and rebates, declining GDP growth, and the like. However, the company stated on its last earnings call that "the government is providing strong incentives for manufacturers to upgrade to the more environmentally friendly equipment." So in certain respects, government policy is currently acting as a tailwind for Cleantech. Though the wind sector is facing some challenges, Cleantech is well diversified, and every other division of the company seems to be operating at full throttle.
Investors have finally started to trust and reward small cap, under-the-radar Chinese companies that have posted huge numbers. China Auto Logistic (CALI), for example, recently surged almost 400% following its earnings report. I expect a similar near-term move in the shares of Cleantech, with an ultimate 6-10 bagger as this ultimate turnaround story grabs of the attention of the Street.