Tuesday, May 12, 2009

Alloy Steel's 10-Q



Alloy Steel International (OTC BB: AYSI.OB) filed its 10-Q today (summary; full filing). Another break-even quarter: $39,000 of net income on $1,479,774 of sales. As I mentioned in a recent post ("Run Silent, Run Deep"), I had expected a loss this quarter, so I'm (mildly) pleasantly surprised the company was able to break even during what might turn out to have been the worst quarter of the current global recession. Judging from the price action today though, others had higher expectations. Management offered this comment on the quarter and the company's prospects going forward:

The decrease in sales for the period is representative of the general downturn being experienced in the world economy. The number of orders received by the Company have declined as demand for our product reduced as various mining companies announced that new mining projects were being delayed and/or existing mining projects were being wound back until demand for commodities increased. The Company has submitted tenders for the supply of Arcoplate where possible and is confident that these will be successful with orders likely to be received in the next three to six months. The Company has continued to promote its product in the market place as a superior option for maintenance, as well as seeking entry into other markets which were previously limited by the Company’s ability to meet the demand existing prior to the economic downturn. The Company is confident of being able to present its product well in these new markets, and anticipates additional orders will be generated from these new locations.


Updated Altman Z-Score for Alloy Steel

In a previous post ("Using the Altman Z-Score to Calculate the Risk of a Company Going Bankrupt"), we described the Altman Z-Score model for manufacturing companies:

The Altman Z-Score is a model developed in 1968 by NYU Finance professor Edward Altman (pictured above) to predict the likelihood of a company going bankrupt within the next two years. According to Investopedia,

[R]eal world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7"


In creating the Z-Score model, Professor Altman studied an initial sample of 66 firms, half of which had gone bankrupt, and looked for the balance sheet and income statement ratios that had the most predictive value. Dr. Altman settled on these five ratios1:

T1 = Working Capital / Total Assets
T2 = Retained Earnings / Total Assets
T3 = Earnings Before Interest and Taxes / Total Assets
T4 = Market Value of Equity / Total Liabilities
T5 = Sales/ Total Assets


He then assigned weightings to them based on their predictive values to create his model:

Z Score Bankruptcy Model:

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5



Based on this model, a Z-score below 1.8 means bankruptcy is likely within two years; a Z-score between 1.8 and 2.99 is a gray area; and a Z-score above 2.99 means there is little likelihood of bankruptcy within the next two years.


In that post, we noted that the Altman Z-Score for Alloy Steel at the time was 4.89. I re-ran the calculation today using the updated numbers and got an Altman Z-Score of 4.19. Unsurprisingly, it's lower than last time, given the drop off in sales and earnings, but still well above the 2.99 level, above which the model predicts little likelihood of bankruptcy within the next two years.

6 comments:

DaveinHackensack said...

Put in a small limit buy order for under .23. Last time I placed an order for Alloy Steel through Scottrade, I got a message telling me I needed to place the order by phone. This time, probably due to the spike in volume, it went through online.

Alex Garcia said...

from the google finance boards, take it with a grain of salt as I thought you would be interested.

"
mikes97...@yahoo.com
AYSI blew away my expectations on Friday with earnings of $0.068/
share. I believe that news isn't anywhere near fully baked into the
stock price. EPS of $0.068 annualized is $0.272/share. If you assign a
PE of 15 that brings the value of AYSI to $4.08 vs. the closing price
today of $1.925.

Also, there is more good news coming for AYSI including:

- They are doubling capacity this summer which will further drive
revenue and earnings as they have been capacity limited.

- They have recently announced a new wear plate with a much longer
wear life than existing product.

This could easily be a $5 stock later this year and a $10 stock in
2009.

More DD is available here:
http://investorshub.advfn.com/boards/board.asp?board_id=9225

Mike
mikes97...@yahoo.com
View profile
AYSI blew away my expectations on Friday with earnings of $0.068/ share. I believe that news isn't anywhere near fully baked into the stock price. EPS of $0.068 annualized is $0.272/share. If you assign a PE of 15 that brings the value of AYSI to $4.08 vs. the closing price today of $1.925. Also, there is more good news coming for AYSI including: - They are doubling capacity this summer which will further drive revenue and earnings as they have been capacity limited. - They have recently announced a new wear plate with a much longer wear life than existing product. This could easily be a $5 stock later this year and a $10 stock in 2009. More DD is available here: http://investorshub.advfn.com/boards/board.asp?board_id=9225 Mike
May 12 2008, 1:29 pm

DaveinHackensack said...

Alex,

That's from last year, but thanks anyway. The same Mike moderates the Investor Hub message board for Alloy Steel.

Alex Garcia said...

dang lol I just saw May 12 and figured it was this ...my bad

DaveinHackensack said...

No worries, Alex.

BTW, that small limit order filled yesterday at .227.

DaveinHackensack said...

An article in yesterday's Financial Times included this bit of tentatively positive news for Alloy Steel's mining clients:

The Baltic Dry index hit its highest level this year with the benchmark for freight costs for dry bulk commodities such as iron ore, coal and grains up 4.3 per cent to 2,432 points, helped by rising Chinese demand for commodities. On Tuesday, China said iron ore imports reached 57m tonnes, a monthly record.