Revenues Decline at American Oriental - Analyst Blog

American Oriental Bioengineering’s (AOB) third quarter 2011 earnings (excluding the gain on debt extinguishment) came in at 7 cents per share, beating the Zacks Consensus Estimate by  2 cents. The company’s adjusted earnings in the third quarter of 2010 were 7 cents per share. Earnings in the third quarter of 2011 were hurt by lower revenues.

Quarter in Details

Revenues in the third quarter of 2011 declined 41.1% to $53.9 million. Weakness in the manufacturing segment (down 43.9%) was responsible for the slide. Revenues were well below the Zacks Consensus Estimate of $70 million.

American Oriental earns revenue from two operating segments – manufacturing and distribution. While the manufacturing business accounted for approximately 91.1% ($49.1 million) of the company’s total revenue, the distribution business – Nuo Hua generated the remaining revenues of $4.9 million.

American Oriental records manufacturing revenues from two sources -- pharmaceutical and nutraceutical products. Sales from the pharmaceutical product line declined approximately 47.8% to $40.3 million. Sales of nutraceutical products decreased 14.6% to $8.8 million in the reported quarter. The change in product mix impacted revenues.

Gross margin at American Oriental declined to 46.7% from 51.7% in the year-ago quarter. Increased raw material prices coupled with the implementation of new tax rates and surcharge brought down the margin.

Operating expenses in the reported quarter declined 55.6% to $17.0 million. Research and development (R&D) expenses were down 40.4% to $2.8 million. Selling, general & administrative expenses decreased 42.3% to $12.1 million. American Oriental’s cost cutting initiatives resulted in the decline. Advertising expenses plummeted 72.7% to $3.0 million due to reduced promotion of over-the-counter drugs following American Oriental’s shift in strategy.

Our Recommendation

We currently have a Neutral recommendation on American Oriental. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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