Thursday, November 15, 2012

Deer Consumer Products: An Overseas Trend Best Not Ignored

China's economy is still on a roll. Maybe not at the breakneck speed of the past decade, but the economy is still growing at a comfortable 9-plus percent.

The China Academy of Social Sciences most recent GDP forecast calls for 2010 economic expansion to finish 2010 at a 9.9 percent rate, with similar growth in 2011. The government think-tank predicts greater stability in China and little change in the government’s macroeconomic policies. The World Bank has projected China’s economy will grow 9.5% this year and slow to 8.5% next year.

Some foreign observers estimate that more than half China’s population falls under the definition of "middle-class", and have concluded that in the next decade China’s middle class population will grow to 700 million. However, the Chinese government has placed the middle class number at about 20 percent of the 1.3 billion people. Either scenario leaves more room to grow in the years ahead.

Many U.S. investors are leery of investing in this growth, often because many of the opportunities are so new. But many companies are capitalizing on the homeland’s rising middle class and expansion into the global economic recovery.

Consider small cap manufacturer Deer Consumer Products (Nasdaq: DEER). Since the company began in 2006, it has grown rapidly and its stock has risen 78 percent since it first became available in a July 2009 IPO.

Not to be confused with American tractor maker John Deere & Co. (NYSE: DE), which is making inroads in developing nations (including China) with its tractors and other equipment, this Deer is also a fleet-footed global competitor more comparable to companies like Whirlpool (NYSE: WHR), National Presto (NYSE: NPK), and Jarden (NYSE: JAH).

You've probably seen Deer's products on U.S. retailers' shelves - maybe you even own some. The company makes kitchen appliances such as blenders and juicers. It makes appliances that sell under the Black & Decker brand of Stanley Black & Decker (NYSE: SWK) as well as Betty Crocker products, under a licensing arrangement controlled by General Mills (NYSE: GIS). Deer also makes electric appliances sold by various retailers under their own private labels.

But most important for Deer is the potential in its homeland country of China. The company introduced the Deer brand in 2008 for the China market because, according to its 2009 annual report, "...urbanization, rising family incomes and increased living standards have spurred demand for small appliances in China."

***Deer says that in 2009 it sold 7 million products to customers on five continents. All told, Deer's products include blenders, juicers, soy milk makers, pressure cookers, and dehumidifiers, among others, which it says meets the safety requirements in all markets where they are sold, including North America and Australia.

For the third quarter, Deer reported that its profit more than doubled to $9.3 million, from $4.1 million a year ago. Revenue climbed to $55.3 million from $26.5 million, and the company credited growth in the high-margin Chinese domestic markets. Earnings per share were $0.28, up from the year-ago $0.18 and topping analyst expectations of $0.21.

Deer also raised its full-year estimates, to $0.88 per share on revenue of $172 million, up from $0.76 and $160 million, respectively. In 2011, Deer places its net income and revenue growth at 30 percent over the 2010 estimates. The company also boasts a strong balance sheet, with $75 million in cash and no long-term debt or credit lines.

***According to an analyst survey by Thomson Reuters, the median 12-month price target on shares of Deer is $17. That price target implies shares are fairly valued at 14.9 times 2011 EPS estimates, which seems pretty reasonable for a fast growing company.

But Deer's stock is down 20 percent from the 52-week high of $13.80 posted in January. Given the impressive growth, investors are presented with an excellent buying opportunity.

Deer appears determined to build its reputation with consumers both at home and overseas. Currently I think the stock is oversold at around $11.00.

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