Global Sources Ltd. (Bermuda) (NASDAQ:GSOL)

BOSINVMTSOLUTION (< 20) Submitted: 2/25/2008 2:56:04 AM : Start Price: $13.00 GSOL Score: -59.65

The company Global Sources primary business activity is promoting business-to-business transactions. They do this by linking suppliers and buyers worldwide and primarily in China. The company’s source of revenue comes from three sources: online services, other media services, and trade shows, seminars, and exhibitions. The company’s has almost no debt and any current liabilities are largely customer advances.    A ratio analysis supplemented by a general understanding of the company’s capital structure is indicative of several things. The cash to current liabilities ratio is by no means small but is not clearly indicative of the situation. If you were to take out the customer advances in regards to CL the ratio would be very much higher (customer advances in the type of model are very common). Common equity makes up the majority of the financing for the company at 2.5 times the amount of total liabilities. The Company keeps most of its cash in treasury securities maturing in 6 months or less at an amount of nearly 156 million dollars. Another attractive variable regarding this company is its profit margin growth. The only other company to even come close is Google. The actual margin is not so close but the growth is still there.    While this is a short and extremely simplified analysis of Global Sources the business can be broken down for Peter Lynch’s fundamentals. The company is definitely a fast grower with EPS advancing at a little over 50% in the prior year. The company has an extremely large amount of cash on hands considering its small market cap of 632 million. Whether this is good or bad is up to further debate. The company also seems to occupy a niche in the industry with its business-to-business solutions and its long track record. The avg. volume traded is low when compared to its peers, and only 13 independent research providers follow the company which can be indicative of a less known company. The company’s unique business plan eliminates the use of inventories and is quite attractive. Institutional investors own 93% of the company, but this figure is very misleading. One owner, Merle Hinrichs, owns 70% of all shares outstanding!! He is the founder of the company and obviously holds a substantial interest in it. This is probably the most attractive feature of the company, as passion is a key driver of success and it is evident here. I believe Global Sources is a desirable company to own based on two criteria: company fundamentals and valuation. The fundamentals of the company are ranked very high by many independent research providers and for good reason. The company uses a capital structure consisting of no debt and finances the company with equity. Also Global Sources has a substantial amount of cash and short-term investments, which could indicate possibilities of artificial growth in the form of acquisitions. Profit margin has grown by a total of 256% in the past 5 years and earnings per share doubled in the most recent year. Another nice thing about Global Sources is the relative small size of institutional ownership in the company at 16.58%. The chairman of the company holds a 70 % stake in the company and we believe this could be a key driver for success. This company is a top performer in regards to ratio analysis when compared to all other companies in its sector, but is especially attractive in regards to valuation.    While all other companies in this sector such as Baidu have been bought feverishly by investors pushing their market valuations to extended levels GSOL has stayed relatively flat at 20 times earning. The industry has a current valuation of 32.2 times earnings, which makes GSOL appear relatively cheap in regards to its current EPS. The most recent year saw NI and EPS double for the company, and the only year that showed signs of growth problem was 2005, which will require further analysis. Overall we believe Global Sources is an attractive investment mainly due to its growth prospects and cheap valuation when compared to the rest of its industry.