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Tuesday, August 22, 2006

Eternal Technologies (ETLT) Q2 Results

Eternal Technologies, ETLT (combined links) filed their Q2 10-Q report today.

Period ending June 30, 2006.
40,567,300 shares on Aug 20, 2006 (still unchanged since March 31, 2006)

Balance Sheet:
Cash just keeps increasing. $18 million in Dec to $23 million in March to $27 million in June.
Short term investments still around $10 million.
Accounts Receivable plunged to under $1 million from $3.5 million in March and $7.1 million in December. Great!
Inventories down slightly. Good.

Real net cash (plus short term investments) is over $35 million, over 85 cents per share (although it's restricted, see here). Considering that total assets are only $53 million, that says a lot about the company being largely cash right now.

Income Statement:
Revenues are up slightly (but expect a lot of lumpiness in the business). Gross margins overall seem roughly about the same.
The gross profit margin from cattle embryo transfers was 27%, gross profit margin from sheepembryo transfers was 8.3%, the gross profit margin from the sale of roll muttonwas 19.7% and on the gross margin on the sale of E-Sea products was 55.5%.

They didn't break this out in Q1. I should go back and check earlier results. Net margin was around 16% vs 19% in 2005. And this is with other income (vs other expense last year). E-Sea had some taxes.

Depreciation expense is up due to E-Sea, so is SG&A. The real revenue/income story is in the segment information in Note 8. Agriculture revenues dropped from $10.4 million in 2005 to $8.9 million in 2006 with operating margins dropping from 21% to 16%. When you look at the detailed explanation, it's pretty much lumpy operations as it's always been, which is ok. E-Sea (which wasn't part of the company in Q2 2005) added $1.5 million in revenue with operating margins of 47%. E-Sea had an operating return on assets of 11% while Agriculture had a return on assets of probably around 10%, both good.

The income statement is not glorious, but it doesn't need to be. It simply needs to be adequate considering that the enterprise value of the operations are currently negative (i.e. the stock market thinks the company is worth less than nothing) or else it's hugely bearish on Chinese currency, which seems unlikely considering the prevailing views.

Cash Flow Statement:
Here's where the results look great. With a net income of $2.2 million for 6 months, operations produced $8.6 million in cash thanks mostly to a huge $6.2 million decrease in accounts receivable (it's really just the timing of collections). Depreciation was $531K.

$250K was advanced to distributers as cash burned via investing.

No financing activity.

Expansion in the US will require raising dollars via debt or selling shares.

NOTES: (not covered above)
$52K worth of stock was issued to convert debt.
Not surprisingly, salaries expenses are up.

$117K of the net income is due to a beneficial change in the value of derivatives on the balance sheet (convertibles). ETLT has a small amount of these. If the stock price goes up a great deal, this will change into a significant expense and make the future results look worse. It's not as severe as CXTI, fortunately.

I'd say the results are reasonably good. No surprises. I continue to own the stock.

UPDATE August 24, 2006 evening:
Infinite loop. The news list on Yahoo Finance shows Thursday's Daily Blog Watch which contains a link to this post which caused a huge jump in the amount of traffic here (looks to end up being about 500 visitors today).

UPDATE August 26, 2006:
I just posted an entry called The Big Thing I Missed in the 10-Q. (pssst, it's a good thing)


This is my first time here and I like what I see. Good analysis on smaller stocks is had to come by and you've pulled it off.

Two suggestions that I have for the blog layout. First I think it would be helpful to have a short profile on each stock, then people wouldn't need to leave your site to go to Yahoo Finance to read on what exactly the compnay does. Second, I noticed that your comment timestamp is only the tiem of day but not the date. I think you might want to add the date into the timestamp to make it easier to follow conversations. For example, see http://pink-sheets.blogspot.com/2005/12/eternal-technologies-etlt-links.html where someone asked when ETLT's earnings is due.

Just wanted to pass those two thoughts on, keep up the good work.

Thanks for the comments. I've been getting a lot of traffic today thanks to James Altucher's Blog Watch link. I haven't structured the blog for easy readability mainly because my intent is not to have a wide audience. My goal is more to be a "wholesaler" of investment ideas, but anyone who finds the info valuable is certainly welcome. I tried to explain my approach in the Introduction post.

I've tried to fix the comment date stamp and it doesn't seem to work. That's really unfortunate. Maybe I'll try again.
Ok, at least I got the comment date fixed.
My frightening analysis of ETLT & their business (not their chart) can be summed up in this quote:

"Animal factories are one more sign of the extent to which our
technological capacities have advanced faster than our ethics."
--Peter Singer
Commence rambling:

Well, domesticating animals is certainly not a new technology. And if you look at how primitive people hunt wild animals and slaughter domesticated animals, they aren't very nice to the animals.

I must agree that modern cattle ranches in the US, for instance, treat the animals badly and I'm all for regulations that require basic reasonable treatment of animals. I'd rather do this and pay more for the food, but then I'm not on the low end of the economic ladder. Others may put animal treatment lower on their list of priorities and perhaps Peter Singer could do whatever he can to change their values (which is essentially what needs to happen).

Decades ago, my grandfather ran a cattle ranch in some of the most remote parts of the western US and those cattle were treated well: free range animals without drugs right up to when they got a bullet through the brain standing in a chute on the side of the slaughterhouse. (Vegetarians can call me whatever they want, but I know full well where hamburger comes from and I could probably slaughter a cow myself if I had to, having watched the procedure enough times as a kid.) A good question would be whether Chinese cattle ranches at this point in time are more humane than US ranches simply by not being as far along the productivity curve.

The problem with animal factories is not so much ethics but rather a case of the prisoner's dilemma. From what I hear, most ranchers would rather not treat the animals poorly, but they won't be in business if they don't. Over time, a commodity producer always ends up using the cheapest production methods possible (or else they're replaced by one who does). Civilization is almost by definition a solution to the prisoner's dilemma of all sorts of aspects of human activities. In this case, there would need to be an agreement, enforced by law, raising minimum standards of animal treatment. I have confidence that eventually those standards will improve. In cases where it's economically important to treat animals well, it's amazing how much technology has advanced to keep cattle happy as they're being slaughtered (1/3 of all cattle slaughterhouse chutes are designed by an autistic woman, Temple Grandin, who has an uncanny ability to understand how animals think and react to situations, she's written some great books on the subject like Thinking in Pictures).

I suppose all technologies have always advanced faster than "ethics" because the ethics require large groups of people to recognize a problem (which won't happen until after there is a problem) and solve it systematically and pragmatically as a group with clearly defined laws, enforced by force. Recognizing that one always follows the other doesn't help bring them closer together in time just as avoiding an industry won't improve it.
I appreciate your view of ETLT. I own the stock and plan on buying more before the Oct 12 meeting. My gut tells me that if this deal had a little IR behind it the stock would see $1.00 or better. The big issue to me is that the story is not simple to tell. To have two business units doing very different things is a messing story. Maybe it is just me.
Anyway, thanks again.
I don't expect much (anything) from the Oct 12 meeting. I tend to think that the accounting issues, the strange nature of the business, and other oddities keep the price down.

I see the accounting issues being dealt with effectively and I expect all that to end this year. If the company had a clear message about what it's doing and what the plans are for the future, it would help. This latest round of possible business ventures doesn't play well, but I actually don't view them as badly as I've portrayed.
What do you think about the ETLT numbers. At $.05 a share in earnings for the quarter this stock should be at $2 or am I crazy?
One other quick question. What do you think of INMG. It is a new deal and what I like is the hits they are getting on their CattleNetwork.com site. It looks like over 6,000,000 a month and growing. Any insight would be helpful.
About ETLT, the market is acting like it's a fraud. Why else would the shares be selling at 50% of net cash value while the business is looking like it'll have a P/E of around 3? Personally, I think the market is wrong.

About INMG, I have no idea... except that companies that present themselves to the market have typically been made to look very good. I haven't looked at it (have I?) but maybe I'll look at it some time.
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