Tuesday, December 15, 2009

More Alloy Steel

Bought a few more shares of Alloy Steel International (OTC BB: AYSI.OB) at $2.18 today. I am curious what Q4 earnings number it will take to support the current price. My initial guess was 7 cents, but my small survey (n=4) on iHub resulted in average of 5.6 cents as the earnings number needed to support the current price. Maybe I'll try a similar survey on AYSI's Yahoo message board (if anyone reading this owns the stock, feel free to leave your guess in the comment thread -- remember though, this isn't your guess of what the earnings will be, but what they would need to be to support the current share price). The company had announced that it was running two mills at full blast after landing its huge supply deal with BHP, but that wasn't the case for the full quarter. The company's highest quarterly earnings were 6.8 cents in Q2 of 2008, and that was with one mill running at full capacity. That was with an earlier version of the company's product though.

My guess is that the company will release record earnings and trade higher on that news, which is why I picked up a little more here. If it disappoints on the quarter, but the longer-term thesis remains intact, I'll buy more on the drop. Barring a nasty exogenous event (e.g., a big fall-off in Chinese demand for industrial commodities1), I think I will do well adding at this price.

1That's the big question. We presented the positive view on China this post back in September, "China's new self-propelled economy", and the editors of the FT presented the scary view in this editorial last month, "The cost of China’s excess capacity". In a nutshell, the positive scenario: China's big stimulus this year has helped transition its economy to one fueled more by internal demand, in which case there should be continued growing demand for industrial commodities to build infrastructure in underdeveloped parts of China, manufacture first refrigerators for rural Chinese, etc. And the negative scenario: China's stimulus has been mainly hair of the dog, propping up an unsustainable status quo relying on massive trade surpluses that over-extended Western consumers can no longer support.

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