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Biostar Pharmaceuticals Inc. (NASDAQ: BSPM) Delivers Eye Popping Top Line in Q1

Biostar Pharmaceuticals (NASDAQ: BSPM), one of the hottest China stocks of '09, delivered Q1 numbers Friday post close. Review below. First, the week in review.

It was another ugly week in the markets as the Greek infection spread to the entire European Union in the market's mind. Europe continues to provide a high level of fear. The market is in a bad mood right now, and has reverted to a "cash at any cost" mentalility, which spells opportunity for aggressive investors seeking growth at extremely reasonable prices.

There always some "Big Trade" out there for the giant money, and right now it's "Short the Euro, and go Long Gold".  The Euro is collapsing, and gold is making multi year highs.

Early this past week an $1 trillion rescue package was put together for Greece. The European Nations appeared to be united in an effort to stem the blood flow. By the end of the week, a wide spread belief it would be possible for the European Union to actually disband and abandon the Euro pervaded the markets. As a result the DOW was down 162 points on Friday- about 1.5%. The NASDAQ and S&P 500 each shed about 2% on Friday.

China based stocks have really taken on the chin this year after outperforming US stocks by about 30% in 2009. Revenues and earnings are growing far faster in China than their US counterparts, but a media driven fear of a real estate melt down along with a monetary tightening policy in China have put the brakes on new money flows for now.

It's ironic. The talking heads complain about inflation and a possible real estate bubble in China, and when the government raises interest rates and takes steps to tighten credit, other so called experts forecast a slow down. It's simply a correction which should run its course soon. Nevertheless, the growth of the red hot Chinese economy is inevitable. It has now surpassed Japan and become the second largest economy in the world. Estimates have China's GDP surpassing the formerly invincible US economy in 15 to 20 years.

Companies with 50% growth rates on both the top and bottom line are trading at single digit PE multiples vs and average of about 17 for an S&P 500 company that would be God like if it were capable of grinding out 10% annual growth.

Earnings and growth will always win out for investors in the long run. I can't recall ever seeing such glaring disconnects in any market, but there you have it.
 

Biostar Pharamacuetical (NASDAQ: BSPM) Q1 Earnings; Eye Opening Top Line

Biostar was out with Q1 earnings Friday post close, and the numbers prove this is a great growth company. The stock has run up a bit off the fat finger lows, and I believe Friday's numbers are more likely to lead to a short lived and shallow correction. This stock is likely to follow the pattern most China stocks have repeated- a run up into earnings, followed by a number that has investors wondering why the stock is so cheap, followed by a brief and rather shallow sell off as the hot money runs for the door along with the scared money.

I like everything I read in the 10Q, but here's what the market won't like- it won't like the EPS number relative to top line growth. Sales grew at a breath taking clip, but the profits did not follow suit commensurate with the top line. Let's dive into the numbers:

• Revenues rocketed from $7.447 million in Q1 '09 to $12.36 million in Q1 '10- an enviable 64.5% growth rate.
• Gross profits as a percentage of sales improved as well, which is really strong- gross profits improved from 64% in '09 to 77% in '10- analysts love this trend.
• Net profits improved by only 20% from $1.829 million to $2.263 million- there's the rub.

After you note the number of shares I&O moved from 23.2 million to 25.8 million, and you combine the low net profit margin, you come up with a company that delivered .$09 in EPS vs $.08 in Q1 of '09. In a sell now, ask later market, the stock will likely correct a little.

My estimate for EPS in 2010 has been $.50 to $.60, which could easily put this stock into the $6 to $9 range. With $.09 in the book for Q1, traditionally the slowest in China, the possibility for attaining my forecast still remains intact. This company continues to grow quarter after quarter, and they've just barely begun to tap into the market for their HepB OTC therapy.

If the marketing expenses for the year are front end loaded, then there's a good chance they can deliver my forecast numbers. BSPM has publicly stated they anticipate $80 million in revenues this year, so to be correct there's still $67.5 million to come. Only 15% of the way, with 75% of the year in the rear view mirror.

Net profits are the issue. A formal forecast of $18 million has been made. BSPM is only 10% of the way to that number with 25% of the year in the books. If the year is front end loaded on marketing expenses, the number is still attainable. If not, I don't see it. It's likely management will address the issue specifically in Monday morning's conference call.

The familiarity of this chart is striking. Like so many of BSPM China based brethren, the rug has been jerked out from under this price. At this point, it's nearly comical. Consider the following valuation argument. Suppose BSPM only earns $.09 in EPS for the next three quarters. We end up with $.36 per share in earnings for 2010.

Now, let's take the wild leap of faith the market will eventually price the company at about the same multiple for the S&P 500 with it's anemic 8% growth rate- let's say the S&P 500 trades at 15 times trailing earnings. 15 x .36 is $5.40- still about 42% above Friday's close. You won't go broke making 42% on your money. I believe there's a lot more upside than 42%.

This chart tells me the current downside risk is to about $3.15- that's would be Mr. Fibonacci's retracement of 61.89% of the entire 2009-'10 move. $3.15 should not only represent a worst case support level, it also represents the absolute perfect level to pad your portfolio. I don't know if we'll see it, but I would suggest pilling in if we do.

There's a call to discuss the numbers Monday morning. A statement the marketing expenses were front end loaded, and $18 million in net profits is still in their mind's eye, would suggest there's a killing to be made from these levels.

Disclosure: Long

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