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China Security & Surveillance

How do you analyze a company that is winning loads of new business but keeps reporting tepid sales? That's the conundrum investors face with China Security & Surveillance ( CSR), which continues to build a massive backlog on the heels of new contract wins. But those contracts are stretched out over an extended period of time, so the company has lagged revenue forecasts for four straight quarters. Sales will likely still grow an impressive 25% this year, but that's half the forecasted growth rate expected earlier in the year.

The third quarter brought more of the same. Sales growth, due to the timing of some contracts, was just 14% from a year earlier, but backlog shot up from $213 million at the end of June to more than $400 million.

China Security & Surveillance is one of the leading suppliers of security gear to companies and governments in China. The company is benefiting from a government-mandated "safe-city" program that seeks to deploy banks of video cameras, traffic management systems and emergency response systems in China's 200 largest cities.

As is the case with China XD Plastics, China Security & Surveillance has soured investors with its serial capital-raising efforts that dilute existing shareholders. The number of shares outstanding shot up from 53 million a year ago to a recent 88 million. That led to a recent 30% quarterly drop in EPS, even though net income was 50% higher than a year ago. Management anticipates only modest growth in shares outstanding next year, which should enable EPS to move toward the $1.15 mark.

Shares trade for just five times that forecast. That multiple won't stay that low in 2011 if management can refrain from diluting shares further and if it can deliver sales results that finally meet or exceed forecasts.

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