China Fire & Security Group Inc.‘s (CFSG) reported its second quarter results last week. The company posted earnings of 29 cents per share, beating the Zacks Consensus Estimate of 23 cents and up 24% year over year. The earnings growth in the quarter was primarily driven by higher revenues.
Quarterly revenues were $22.7 million, up about 37% from the prior-year period. The company benefited from higher sales of system contracting projects and products during the period. Gross margin was up 260 basis points at 63.8%, while operating margin increased 250 basis points to 42.1%. Margin expansion was primarily due to increase in revenue and higher total solution projects from the iron and steel industry employing the company’s high-margin proprietary products.
The company is benefiting from China Iron & Steel Industry’s Revitalization Scheme, which promotes total production control, encourages industry consolidations and emphasizes the development of new technologies. This stimulus plan provides financial subsidies and loan discounts to leading iron & steel companies, allowing larger and more advanced steel producers to upgrade existing plants and to build new ground-breaking facilities. CFSG sees huge growth potential for the Total Solutions business as it derives more than 80% of its revenue from the iron and steel industry.
CFSG reiterated its full-year revenue guidance in the range of $88 million to $95 million, reflecting year-over-year growth of 28% to 38%. The company is bullish about growth prospects for the year, primarily in the iron and steel industry. In addition, the company is now expanding into other sectors such as nuclear energy, power and petrochemical. With China’s industrial fire protection segment estimated to grow more than 11% annually until 2011, we believe the company is well-positioned to leverage the growth potential in the market.
The company raised its net income forecast to $28.3 million to $29.7 million or $1 to $1.05 per share from the previous guidance of $26.3 to $28.4 million or 93 cents to $1.00 per share due to higher than expected gross margin expansion. The Zacks Consensus Estimate for the year is $1.05 per share.
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