Can Kandi Grow Into its Valuation?
Board: Kandi Technologies Group
When a stock has a six or seven fold rise in less than a year is it automatically overpriced? KNDI grew fivefold from $4 to $20 in less than a year, from June 1, 2013. Or was it undervalued at $4? I think one should test the price against fundamentals: sales, earnings, growth and the competitive environment.
The first thing one must do is to reverse the nonsense that GAAP adds to the Financial Statements. In Kandi's case the two most obvious items that need reversing are the valuation of warrants and stock options. I have argued for years that stock options should not be included in the Financial Statements except as footnotes. Stock options are NOT a business expense but an agreement between stockholders and conflating the two just creates big mess. It's an argument I lost. Since 2008 FASB has also forced companies to price warrants like options and with large swings in stock price the effect on the Financial Statements is like a tsunami against a defenseless shore, totally overpowering and I doubt it achieves its intended purpose, to make shareholders safer. It too just creates a gigantic accounting mess.
I have not gone through the 10-K in detail, I'm using management's non-GAAP figures for 2013 net income to calculate the real ttm P/E ratio. I give three figures that correspond to the number of shares outstanding: 1) the shares reported in the 10-K, 2) the shares reported by Yahoo, 3) my estimate of the diluted shares once the current warrant are exercised.
[See Post for Tables]
A P/E ratio of 150 should rightly scare investors. I doubt I would have the guts to buy at this price but I got in early, before the stock was "discovered," and I've taken profits to the point that my risk is minimized. That makes my point of view not one of "buy or don't buy" but "hold or don't hold." It's a big difference.
What usually happens as a growing company matures is that the P/E ratio contracts to more normal levels. My spreadsheet exercise is designed to determine the result of two growth rates. This is not a forecast by any means. The purpose is to see if at the current price, with accelerated Net Income growth, an investors can earn a 15% return as the P/E ratio contracts.
In my spreadsheet Net Income grows at 50% for ten years while the stock price grows at 15% thereby contracting the P/E ratio. I've held the shares outstanding steady at 39 million. Growth in shares can be approximated by reducing the Net Income growth rate. In this model the P/E ratio shrinks to 11.11 in ten years, a ratio that is quite appropriate for this kind of industry.
But, is a 50% growth rate reasonable? In ten years Net Income would rise to $300 million. Yahoo! shows a range from $2.64 to $23.38 billion Net Income for four leading car makers. Kandi would have to grow to one tenth the current Net Income of Tata Motors [TTM]. If Tata doubles in ten years, Kandi would be only 5% of Tata despite serving the world's largest car market.
To me that does not sound outlandish.