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Price action was interesting Monday too.
Big loss on the Q, but no drop, because everyone read about the much bigger sales order in the 10-Q. It seems like most of the weak hands were shaken out of the stock over last year or so, and everyone still in understands the story. Another data point in support of this theory is that recently when the stock has dropped ~20% on a day, folks like us have been buying on the dip and the stock comes back within a day or so. The shareholder base has gotten hardened like an Alloy Steel wear plate.
Another interesting note on the Q was that, despite the big loss, the company's net working capital remained pretty healthy at ~$1.7 million, down less than $100k from the previous Q. I haven't run a new Altman Z-Score on AYSI yet, but the previous positive score correctly predicted that the company was in no danger of insolvency, despite the claims of a certain commenter on this board.
Record amounts of iron ore
Have been imported by China recently. Chinese steel production is surging. Whether that has resulted in sales for AYSI, I have no idea, since the company has been on radio silence since the last quarter. But the outlook for iron ore looks better now than it did at the beginning of the year.
It will be interesting to see if the Mongolia JV with Geomandel gets revived. If I had to guess, I'd say that both parties might want to wait until later in the year to see how sustainable China demand is before committing to the JV. But maybe we'll get lucky.
What's your biggest position, LF?
That cement company?
China demand aids Baltic Dry Index recovery
From yesterday's Financial Times:
Rising demand for raw materials in China has led to a sharp recovery in the Baltic Dry Index, the benchmark for freight costs for dry bulk commodities such as iron ore, coal and grains.
The Baltic Dry jumped 7.6 per cent to 3,164 points on Wednesday, pushing through the 3,000-points mark for the first time since October as shipping congestion outside China’s ports reached record levels with 80 Capesized vessels awaiting unloading.
Day rates for the Capesized vessels, which transport iron ore and coal have risen strongly in recent weeks, up from $22,000 at the start of May to $57,000 on Wednesday.
http://www.ft.com/cms/s/0/de5c85d4-4aea-11de-87c2-00144feabdc0.html
I don't expect any quick fix.
I just posted a link to a news article that suggest that the demand for steel (and hence, iron ore) may be recovering. You dismissed the previous article I linked to which noted that China imported more iron ore last month (57 million tons) than in any previous month. In a moment, I'll post another article which also suggests that the demand for iron ore may be recovering. Feel free to offer your thoughts on it.
Steel shares climb as analyst sees demand rising
http://finance.yahoo.com/news/Steel-shares-climb-as-analyst-apf-15359378.html;_ylt=Av2y9IQKetDPHF7ZtIGaEi.7YWsA?sec=topStories&pos=6&asset=&ccode=
From yesterday's Financial Times:
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.
http://www.ft.com/cms/s/0/c0563cf0-40e6-11de-8f18-00144feabdc0.html
Why wouldn't Alloy Steel survive?
It has remained in the black during two of the worst quarters the global economy has seen since WWII, and its major capital expense (the second mill) is in the rear view mirror. If revenues decline further from here in the near-term, AYSI can shed employees and lower costs to remain profitable as a smaller company, but that doesn't seem to be the tack AYSI has taken. Instead, they have been aggressively going after new orders, which -- according to the 10-Q -- they expect to see hit within the next 3-6 months.
The article covers some of your points:
Recent key reforms may also work to create inner-dynamism. A healthcare plan, which envisages spending Rmb850bn ($125bn, €100bn, £85bn) until 2011 on basic health insurance and grassroots clinics, is intended, in part, to expand disposable income. The spreading monetisation of agricultural land, under which farmers have started to use land as collateral for loans or as registered capital for setting up companies, has the potential over time to transform the rural economy.
The unlocking of inner sources of strength will be crucial for China if it is to grow robustly in the face of declining global demand. Foreign trade for the first quarter fell 24.9 per cent year-on-year, but overall gross domestic product grew by 6.1 per cent during the same period.
Some of this growth has come from the initial implementation of a Rmb4,000bn fiscal stimulus package, but the bulk of planned infrastructure spending has yet to get under way.
Why continue to lie?
It's easy enough to be bearish about Alloy Steel without making up lies. Why not try being honest for a change? Six months ago, you were lying that the company was in imminent risk of bankruptcy.
Today, you lied by claiming that the language in the current 10-Q about raising equity was some sort of ominous warning based on this quarter, and I proved you wrong by showing that the same language appeared in the 10-Q during the company's stellar quarter a year ago; i.e., it's boilerplate, CYA language that appears every quarter. So why further erode your credibility by continuing on this tack?
Another thought on this.
China is dependent on the U.S. and their economy will mirror ours to a large degree. I note a 22% reduction in Chinese exports in April doesn't bode well for China.
Check out this article in yesterday's Financial Times, which argues that China is transitioning from an export-dependent economy to one driven more by internal economic growth ( http://www.ft.com/cms/s/0/5864a2fc-3dc2-11de-a85e-00144feabdc0.html ). As evidence, the writer cites the recent double-digit increases in Chinese retail spending year-over-year, the increase in domestic cargo shipments, etc.
The point is that China may continue to grow at a fast rate, but its growth may be driven more by manufacturing stuff for its enormous domestic population than in manufacturing MyPlace Cozies for export to American consumers. Considering that much of China's current exports are comprised of molded plastic (such as the MyPlace Cozy), China may end up using more steel in making durable goods for its domestic market.
The powers that be in China seem to believe this is the case; hence, their recent investments in international mining companies.
Why post lies when they are easily disproved?
You write that a dilution warning first appeared last August. That's false. Here is a dilution warning from last May's 10-Q, when they recorded their best quarterly earnings (6.8 cents):
The sale of additional equity or convertible debt securities could result in dilution to our stockholders.
LOL. You'll need more than Rawnoc and Brig
To get those prices, I think.
It's boilerplate if it appears every Q
If they include the same statement when they earn 6.8 cents per share and when the break even, it's boilerplate.
Again, boilerplate. It's in all their 10-Qs.
For example, check out the 10-Q from a year ago, when the company earned 6.8 cents per share ( http://biz.yahoo.com/e/080509/aysi.ob10qsb.html ). You'll find the same two paragraphs:
We anticipate that the funding of our working capital needs will come primarily from the cash generated from our operations. To the extent that the cash generated from our operations is insufficient to meet our working capital needs or our needs to purchase machinery or equipment, then we will need to raise capital from the sale of securities in private offerings or loans. We have no commitments for raising capital. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
The Company is reviewing options to raise additional future capital through debt and/or equity financing, and whilst it has a facility approved to fund equipment purchases if required, it currently has no commitments to use the facility or obtain further amounts through the issue of equity or other debt financing arrangements. While management believes that its current cash resources should be adequate to fund its operations, the Company's long-term liquidity is dependent on its ability to continue to successfully increase the present level of sales at a profitable margin."
Put in a limit buy order below .23
Last time I tried buying this online via Scottrade, I got a message telling me I needed to call the office to place the trade. This time, it went through online. Must be because of the jump in volume.
In fact I do.
It's now 4.19. More details here: ( http://thehackensack.blogspot.com/2009/05/alloy-steels-10-q.html ).
By the way, it's nice to see you in high spirits. I recall that you seemed to be at maximum pucker factor a few weeks ago.
Why didn't you sell out last week?
You could have sold for more after that fellow picked up his 50k shares. Did you really expect a good quarter, during arguably the worst quarter in the worst global recession since WWII? As I mentioned elsewhere recently ( http://thehackensack.blogspot.com/2009/04/run-silent-run-deep.html ), I expected a loss this Q, so I am somewhat pleasantly surprised by the break even Q.
Boilerplate. Same talk was in there last Q.
Goldman's chief economist was even more bullish on China a few weeks ago in the FT. Can't find the link though.
If anyone here is still following KSW, here are some notes on my conversation with its corporate counsel today: http://thehackensack.blogspot.com/2009/03/ksw-update_27.html
Some notes on my conversation with DSNY CFO Fred Vandenberg today, if anyone's interested: http://thehackensack.blogspot.com/2009/03/destiny-media-update.html
I explained the point of the Z-score
for AYSI in this message: http://investorshub.advfn.com/boards/read_msg.aspx?message_id=36416876
You need a refresher on enterprise values.
You deduct cash and cash equivalents -- not inventory. VBDG has a scant $145k in cash, and no short-term investments that could be considered cash equivalents.
Also, your math is wrong. VBDG's enterprise value isn't "roughly equivalent" to its market cap. VBDG has $14,400,000 in total liabilities. And in its ~$3,000,000 market cap and you've got $17,400,000. Subtract out its $145k in cash, its $5,769,000 in AR, and its $503,000 in "other current assets" and you get an enterprise value of $11,128,000.
That's assuming that VBDG will actually collect on all of its AR. In this economy, that's not a sure thing.
That's what I try to do.
Avoiding companies like VBDG, that are at risk of bankruptcy, gives you one less thing to worry about.
'Me thinks a stock trading at 1/15th of sales'
The stock may look cheap now, after getting hammered yesterday, but an acquirer would have to assume VBDG's debt. With all that debt overhang, VBDG isn't cheap. It has an enterprise value of about $12 million -- about four times its market cap.
An operating profit of $195k
After $3 million in losses over the previous four quarters. Impressive.
Another problem with that scenario:
If you were a potential acquirer, instead of offering a premium for the company's shares, and buying the whole company, why not just wait for VBDG to go bankrupt, and then buy whatever assets you want out of the wreckage for less money?
You guessed right.
My broker doesn't let me short penny stocks. But don't worry: I'll find one that does. It will probably be too late to short VBDG, since it may already be bankrupt by then, but the Altman Z-score model will help me identify other POS stocks before they start their terminal decline.
Incidentally, for those of you who would like more detail on the application of the Altman Z-score to VBDG, I've recapped the info here: http://thehackensack.blogspot.com/2009/03/applying-altman-z-score-model-to-non.html
The Altman Z-Score Model Deals with Facts
Not speculation. When next quarter's numbers come in for AYSI, I'll re-run the Z-score for it and post the info here. If AYSI has another weak quarter (as I expect it will), I expect its Z-score will decline, but will still be about the 2.99 level that indicates the company is in good financial health. We'll see.
A useful tool to add to the toolbox
Any VBDG investor who acted on the warning given by the Altman Z-score on Wednesday and sold out of his position would have saved himself from the 31% drop Thursday.
If 'no one cares' about the formula,
Why have you gotten so worked up about it? The usual approach to something you don't care about is just to ignore it. Instead, you seem to spend a lot of energy trying to discredit a model that is widely used and respected (by investors, academics, judges, etc.) and has a 72%-80% track record in predicting bankruptcies within two years.
Correction:
The last Altman Z-score (modified version for publicly-traded non-manufacturing companies) I ran didn't look right, so I ran it again. I must have entered a number in wrong last time. This time I double-checked the data and got a score of -4.30 using Ironwood Advisory's online calculator ( http://www.ironwoodadvisory.com/zscore.htm ). Ironwood's site gave this message along with that Z-score:
Your Z score is in the low range. The Z score test predicts bankruptcy. We recommend contacting Ironwood Advisory for assistance in interpreting the Z score and improving your company's financial health. Smaller firms should note that these models are based on data from firms with assets in excess of $1,000,000. If it is believed that asset size affects Z scores, then their use may not be appropriate.
I calculated the numbers manually as well and got a similar number.
You are whistling past the graveyard too.
"your precious Z-score implies that 72% of companies that aren't profitable today will be filing bankruptcy in 2 years no matter what the economy is like."
False. Companies with negative earnings can still have high Altman Z-Scores, if they have strong balance sheets. The Altman Z-Score Model is nuanced enough to account for this, which is why it has such a high accuracy record.
"VBDG went public via reverse merger and part of the data you are inserting includes the data from the empty shell that VBDG merged into."
The data came from the VBDG's most recent SEC filings. Why should its reverse merger five years ago invalidate any of the most recent balance sheet data or the last four quarters of losses?
You are whistling past the graveyard.
JaxWorks reiterates a point made by Gregory J. Eidleman, CPA, an accounting professor at Penn State, in a paper he wrote in the CPA Journal. As for your "scholarly sources"...
One of your "scholarly sources" was the blog "Humble Student of the Markets" ( http://humblestudentofthemarkets.blogspot.com/2008/05/limitations-of-altman-z.html ). That blogger noted that the Altman Z-Score doesn't work well for financials (I have already mentioned this bit of common knowledge, and VBDG is not a financial). He also noted that, in his experience, it doesn't work well for utilities (VBDG is not a utility). And, finally, he gave a hypothetical example of a restaurant (VBDG isn't a restaurant; and the Altman Z-score model is meant for companies with assets greater than $1 million in an case, which would exclude most restaurants).
The other "scholarly source" you hung your hopes on was this Investopedia article by Ben McClure ( http://www.investopedia.com/articles/fundamental/04/021104.asp ), where Mr. McClure opined,
"The Z-score also isn't much use for new companies with little or no earnings. These companies, regardless of their financial health, will score low."
VBDG certainly fits in the category of having no earnings, but is it a "new" company? It looks like it was founded in 2004, according to Yahoo! Finance.
Already did, but here's another link for you:
http://www.jaxworks.com/calc2c.htm
And here's the relevant quote, which reiterates what I explained to you in a previous message:
The (Sales/Total Assets) ratio is believed to vary significantly by industry. It is likely to be higher for merchandising and service firms than for manufacturers, since the former are typically less capital intensive. Consequently, non-manufacturers would have significantly higher asset turnover and Z scores. The model is thus likely to under predict certain sorts of bankruptcy*. To correct for this potential defect, Altman recommends that the (Sales/Total Assets) ratio be eliminated with corresponding changes in the remaining ratios.
*Recall, that this is consistent with our recent experience. When I ran the Altman Z-Score for VBDG using the calculator that used the modified model for publicly-traded, non-manufacturing companies, the score came out worse than it did using the original Altman Z-Score model (although both models predicted bankruptcy for VBDG).
I may write a more detailed post on this my blog, using VBDG as a case study. If I do, I'll post a link here for you.
AYSI is clearly in a rough economic period
That's why I ran the Altman-Z Score model on it in the first place.
I was fairly confident in the quality of AYSI's product, and felt that, since the product has been accepted by blue chip miners in Australia, the company ought to be able to sell it to blue chip miners in other parts of the world. Also, since AYSI's technology makes sense for wear plates on bulldozer blades and truck beds, its similar 3-D cladding technology ought to make sense for the pipes used in ore processing and dredging.
My main concern was that AYSI might go bankrupt before the global recession turns, and not survive to take advantage of those opportunities for expanding its business.
That's why I ran the Altman-Z Score model, to get an objective, quantitative sense of that risk. I was pleasantly surprised that AYSI scored so high on the model: a 4.89, when any score above 2.99 means the company is in good financial health.
All models aren't created equal.
In decades of use, the Altman Z-Score model has been proven to be very accurate (72%-80%) in predicting bankruptcy within two years. The model shows that VBDG has a high risk of bankruptcy. Is it possible that VBDG won't go bankrupt? Sure. But the odds are that it will. Invest accordingly.
I've already explained
How the modified Altman-Z Score model is applicable to non-manufacturing companies* with more than $1 million in assets. VBDG is a non-manufacturing company with more than $1 million in assets, so the modified formula is applicable.
*One exception is financial companies, for which Altman Z-Score isn't the best model. VBDG isn't a financial company.
Someone who saw VBDG's red flags in January
From a post by "Dowra99" elsewhere:
VBDG's working capital deficit of several million dollars in a very tough credit environment.
Statements in their filings that they don't have sufficient capital to grow the business (seems like a huge red flag for a company that needs to expand sales significantly just to survive) Makes you wonder why they had a sudden drop in inventory levels prior to the biggest shopping season of the year? Issues getting product due to financing problems?
Material accounting weaknesses as stated in their filings
Falling margins
No history of even sniffing anything resembling an annualized profit as a public company with a history of accelerating annual losses.
In discretionary retail which is one of the worst industries to be in right now.