ZST Digital Networks Inc. - Value

ZST Digital Networks supplies digital and optical network equipment to cable system operators in China. It also provides a line of IPTV devices that are used for bundling cable, Internet and telephone services for residential and commercial customers.

As cable networks have expanded throughout China, ZST Digital has assisted in the installation in more than 90 municipal districts, counties, townships and enterprises.

Revenue Rose 39.6% in the Second Quarter

On Aug 10, ZST Digital reported its second quarter results and surprised on the Zacks Consensus by 32.3%. It was the third surprise in a row.

Earnings per share were 45 cents compared to the Zacks Consensus of 34 cents. The company made 30 cents in the second quarter of 2009.

Revenue jumped to $33 million from $23.7 million in the year ago period on higher sales of Cable TV networking equipment, which rose 51% year over year, and commercial fleet tracking products using the GPS technology.

The vehicle tracking GPS products are a new product line which was launched in late 2009, so there is no comparison with the year ago quarter for those products. But in the second quarter, it represented about 18%, or $6 million, of total revenue.

The company is bullish that given this strong launch and untapped market opportunities in Henan Province for vehicle tracking services, that this product line will continue to grow.

The Cable TV segment is also benefiting from a government mandate to integrate telecommunications networks, cable networks and the Internet as regional broadcasters are therefore upgrading their networking equipment.

Full Year Guidance Raised

Given that the company beat its own second quarter guidance, it's not surprising that it would lift its full year guidance.

Revenue is now expected between $125 million and $130 million, up from the previous guidance of $115 million to $125 million.

It did not provide EPS guidance.

Zacks Consensus Estimates Rise

With the recent second quarter estimate beat and the revenue guidance revisions, the covering analysts have been revising their consensus estimates higher.

The 2010 Zacks Consensus has climbed by 4 cents to $1.63 per share in the last 30 days. There are 2 estimates.

This is earnings growth of 43.4%.

Analysts are also bullish on 2011 as the Zacks Consensus has jumped by 19 cents to $1.84 in the last month. This is still double digit earnings growth, of 12.2%.

Value Fundamentals

In addition to its cheap P/E ratio, ZST Digital also has a price-to-book ratio of 1.3, which is inline with its peers but well within the value parameters.

The company has a strong return on equity (ROE) of 28.4% which blows away its peers who average just 5.8%.

ZST Digital is a Zacks #1 Rank (strong buy) stock.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.

 
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