Wednesday, December 24, 2008

Alloy Steel's Annual Report


Alloy Steel International (OTC BB: AYSI.OB) filed its 10KSB annual report today.

A few notes on it:

- Fiscal 2008 net income was $0.15 per share1, versus $0.08 in 2007, an 87.5% year-over-year increase.

- The company's second mill is completed, and the company expects it to go into commercial production in February.

- The company plans to hire two more manufacturing employees in 2009.

- The company is now looking into the possibility of licensing production of its Arcoplate wear plates in other countries2.

- The balance sheet shows finished goods valued at $765,446. If this represents sales that will be recognized in the next quarter (as was the case with the finished goods that were listed on the 3Q08 10K), and if the company's gross margins remain stable, this could represent approximately $1.4 million in 1Q09 sales.

A more general comment, about the prospects of a "picks & shovels" business such as Alloy Steel's during a steep correction in the prices of mined commodities follows. In a recent article in the Financial Times ("Engineers feel impact of cancelled projects"), the reporter asked the CEO of the British conveyor belt manufacturer Fenner about the impact of the decline in commodity prices. This was the CEO's response:

“Conveyer belts carry materials based on volume and tonnage. If you are producing a commodity, we are driven by volume, not its price,” says Mark Abrahams, chief executive of Fenner.


Of course, if the price of a commodity drops far enough, i.e., below its cost of production, production volume will plummet, but above that price point, a picks & shovels business such as Fenner or Alloy Steel International ought to be less sensitive to fluctuations in price of the underlying commodity.

The photo above, of a truck bed lined with Alloy Steel's wear plate, comes from the Investors Hub page for Alloy Steel.

1This is quite close to a commenter's recent estimate of $0.148, based on the revenue figures in Alloy Steel's last 8K.

2This is a departure from the company's previous position on licensing that we noted in an earlier post ("Answers from Alloy Steel's CFO").

3 comments:

Anonymous said...

Dave,

The shares closed were 0.54 [as of last close]. They are down from a high of 2.95. Why do you think that you might know more than the market assumes about this issue?
You have no analyst following this and no earnings estimates leaving you to depend on hunches and intuitions.

Stick to large caps and value line and don't ever think you can outperform the market through small caps. The analysts do all the hard work and all you have to do is to mint money from their accurate estimates.

Anonymous said...

The above comment is a bogus one though most of them kind of represent my views.

DaveinHackensack said...

It's getting hard to tell the sock puppet from the real Stockdocx.

Regarding Alloy Steel, I can't speak for the market, but I'll tell you why I've been comfortable adding to my position recently at about 45 cents per share. What I am trying to do is buy a piece of a good business and a good price.

Here's why I think Alloy Steel is a good business. I am not an expert on wear plates, but the folks who make purchasing decisions for companies such as BHP Billiton, Rio Tinto, Fortesque, etc. probably are, and Alloy Steel's wear plates are being used by the Australian operations of those companies. If Alloy Steel's wear plates make sense for miners in Australia, then they ought to make sense for miners elsewhere. Judging by Alloy Steel's recent expansions of its business internationally, they do, but the company is still doing business mainly in Australia.

This seems to be mostly because, as a small company, it has had limited sales presence, although the company is working to expand that. So, long story short: the company makes what appears to be a better mousetrap, and that mousetrap has been adopted by blue chip customers in its home market. There's a big world outside of the company's home market where its mousetrap ought to be attractive too.

Additionally, the company's proprietary process can be applied to other products besides wear plates, for example, it can be used to coat the inside of chutes and pipes used in mining and dredging. So far, the company has had sufficient interest in its wear plates that it has been focusing on (and expanding its capacity to) produce just those. But its 3-D cladding process could be a source of additional revenues in the future.

Other positives about the company, from a shareholder's perspective: the company's management owns the bulk of the outstanding shares, so its interests are aligned with outside shareholders, and its management hasn't resorted to dilution so far, preferring to fund the growth of its business primarily from the company's cash flow.

So, assuming it's a good business, why is it worth buying at ~45 cents per share? Here's my thinking on this: at the end of the secular bear market that followed the Great Depression, the average stock traded at 7x its trailing earnings. At 45 cents, Alloy Steel is trading at 3x its trailing earnings. Of course, what matters is its future earnings. I don't know what Alloy Steel will earn in 2009, but the company's expansion of its capacity with a second mill is a positive sign. If Alloy Steel earns just half of what it earned in '08, at 45 cents per share, you would be paying 6x those earnings. That seems like a reasonable price to pay now, all things considered.