Opinion on  Eternal Technologies Group Inc. (ETLTQ)
Eternal Technologies (ETLT.OB) is still undervalued

Eternal Technologies (ETLT.OB) (articles) has had a huge run in the past 3 sessions, trading up almost 50%. That kind of a move puts it in overbought territory using virtually any technical oscillator. Measured against its fundamentals, however, ETLT is still undervalued.



After the purchase of the turtle business, ETLT still should have slightly over $36 million in cash and short term investments on its balance sheet. With about 43.3 million shares outstanding at today's close of $0.92, the market cap is only about $39.8 million. Backing out the cash/short term investments places a $3.8 million valuation on businesses that the company expects to earn over $1.65 million this quarter alone. That's dirt cheap.

When Eternal Technologies (ETLT.OB) (articles) announced it would delay its 10-K to address a comment letter from the SEC, investors assumed the worst. They sent the stock plummeting, even though days earlier the company had posted record revenues and earnings for 2006. Keep in mind this was not an SEC investigation, or even an informal inquiry...just a plain comment about disclosures in a past 10-K. I took advantage of the overreaction to add to my position at $.64.

The smoke has cleared. After the bell Thursday, Eternal Technologies filed its 10-K for 2006, and there were no major surprises. GAAP earnings rose 20.5% to $4.88M versus $4.05M in 2005. ETLT posted revenues of $28.7M, up from $23.0M in 2005. There was some dropoff in the company's main livestock and embryo transfer business, but investors knew that from prior reports. A huge ramp in revenues in E-Sea, the high margin medical equipment division, more than made up for this shortfall, rising from $1.2M to over $8.7M. Note that the Hong Yuan turtle farming business is not included in these figures; that acquisition closed just after the first of the year.

The balance sheet remains rock-solid. At the end of 2006, ETLT had $16.0M in cash and another $18.4M in short-term investments. Deduct $1.9M to account for the cash component of the turtle farm purchase, leaving $32.5M in cash and short-term investments. The company has $443k in convertible notes outstanding, but no major debt. I'm not sure how many shares were issued for the stock component of the Hong Yuan purchase, but I'm guessing around 3M--which would leave about 50M shares outstanding. At yesterday's close of $0.64--my purchase price, that would give ETLT a market cap. of $32M and an enterprise value of zero, zilch, nada.

There are a few caveats disclosed in the 10-K, but nothing too alarming. First, the auditors recognized material weaknesses in the company's internal controls for accounting for unique events, such as acquisitions, and accounting for derivatives under FASB 133 (note: I think that the SEC's comment involved disclosures regarding accounting for the convertible notes). Second, the 10-K reiterated a previous disclosure about a lawsuit that may come to trial in 2007. ETLT says it has a meritorious defense and counterclaims, but if it loses I expect the company's exposure is under $1M.

Bottom line: The company's not perfect, but its a screaming value by almost any measure. It could earn over $5M in 2007. Most importantly, management has twice proved it will wisely invest its cash hoard--first with the E-Sea buy, then with the turtle farming business.

DISCLOSURE: I am long ETLT.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.