Alloy Steel Inc. (fka AYSI)

[DaveinHackensack]

(Taking a page from Grease): Dear S****

I can't respond to PMs here, but feel free to e-mail me at [e-mail].

While I'm here, here is some AYSI info I posted on the company's Yahoo! message board a couple of weeks ago, expanded and updated:

Three objective, positive indicators about AYSI:

None of these predicts the future, but each is objective and based on quantitative analysis, not opinions -- mine or anyone else's:

- Via Audit Integrity, a company that forensically analyzes corporate financial statements using a proprietary system to quantify the risk of fraud on a scale from 0 (extremely high risk) to 100 (extremely low risk):

"Alloy Steel International Inc is currently rated as having Conservative Accounting & Governance Risk (AGR). This places them in the 88th percentile among all companies...".

You pull that info up in the widget at this link: http://www.auditintegrity.com/

- Via Short Screen, AYSI's Altman Z-Score is 5.29. Scores of 3.00 and up indicate financial strength, scores between 1.81 and 2.99 are a gray area, and scores of 1.8 and below indicate financial distress and bankruptcy risk. You can pull up an updated Altman Z-Score on AYSI via the free version of Short Screen in Seeking Alpha's app store: http://seekingalpha.com/store/app/143-short-screen-trial?source=store_learn_more You'll need to be a registered user of Seeking Alpha to access that, but if you're not one, registering takes a few seconds and is free.

- Via VectorVest, AYSI was recently upgraded to a buy. Here is an excerpt from VV's stock analysis report as of last night:

Value: Value is a measure of a stock's current worth. AYSI has a current Value of $1.55 per share. Therefore, it is undervalued compared to its Price of $0.90 per share. Value is computed from forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. Value increases when earnings, earnings growth rate and profitability increase, and when interest and inflation rates decrease. VectorVest advocates the purchase of undervalued stocks. At some point in time, a stock's Price and Value always will converge.

RV (Relative Value): RV is an indicator of long-term price appreciation potential. AYSI has an RV of 1.40, which is excellent on a scale of 0.00 to 2.00. This indicator is far superior to a simple comparison of Price and Value because it is computed from an analysis of projected price appreciation three years out, AAA Corporate Bond Rates, and risk. RV solves the riddle of whether it is preferable to buy High growth, High P/E stocks, or Low growth, Low P/E stocks. VectorVest favors the purchase of stocks with RV ratings above 1.00.

RS (Relative Safety): RS is an indicator of risk. AYSI has an RS rating of 0.65, which is poor on a scale of 0.00 to 2.00. RS is computed from an analysis of the consistency and predictability of a company's financial performance, debt to equity ratio, sales volume, business longevity, price volatility and other factors. A stock with an RS rating greater than 1.00 is safer and more predictable than the average stock in the VectorVest database. VectorVest favors the purchase of stocks of companies with consistent, predictable financial performance.

RT (Relative Timing): RT is a fast, smart, accurate indicator of a stock's price trend. AYSI has a Relative Timing rating of 1.70, which is excellent on a scale of 0.00 to 2.00. RT is computed from an analysis of the direction, magnitude, and dynamics of a stock's price movements over one day, one week, one quarter and one year time periods. Once a stock's price has established a strong trend, it is expected to continue in that trend for the short-term. If a trend dissipates, RT will gravitate toward 1.00. RT will explode from bottoms, dive from tops, and reflect changes in price momentum. VectorVest favors the purchase of stocks with RT ratings above 1.00.

VST (VST-Vector): VST is the master indicator for ranking every stock in the VectorVest database. AYSI has a VST rating of 1.35, which is very good on a scale of 0.00 to 2.00. VST is computed from the square root of a weighted sum of the squares of RV, RS, and RT. Stocks with the highest VST ratings have the best combinations of Value, Safety and Timing. These are the stocks to own for above average, long-term capital appreciation. VectorVest advocates the purchase of safe, undervalued stocks rising in price.

Recommendation (REC): VectorVest gives a Buy, Sell, Hold recommendation on every stock, every day. AYSI has a Buy recommendation. REC reflects the cumulative effect of all the VectorVest parameters working together. These parameters are designed to help investors buy safe, undervalued stocks rising in price. They also help investors avoid or sell risky, overvalued stocks falling in price. VectorVest recommends that investors buy high VST-Vector, Buy-rated stocks in rising markets.

You can get an updated copy of VV's full stock analysis report on AYSI at this link: http://www.vectorvest.com/stockanalysis/

Value Investors Club write-up of AYSI:

Also it's worth checking out the recent, extensive write-up of AYSI on the Value Investors Club: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/38483

You'll need to register for a visitor's account to view the write-up, but that just takes a few seconds and is free. Below are a couple of excerpts though:

My Interpretation

So the sales shortfall appears to be due to technical difficulties with their new mill. Demand for Arcoplate remains strong but they can't get enough made. This is a serious issue if they can't fix the mill. If they resolve their manufacturing issues then the company can return to serious profitability, however. Problems with the mill may have contributed to the reduced gross margin. This happened in the Summer of 2009 as the 2nd mill came on line. Some steel and electricity was wasted as they tuned and adjusted the new mill.


A third mill is not yet in production and management doesn't want to clarify whether a third mill has been built. I believe that a third mill has been built but they are having technical difficulties getting it to make a slightly different version of the product. I do not want to reveal what that difference is to protect the company's competitive position. I'm not absolutely certain that the third mill has been built, however.

The resignation of the CFO is simply because the growth of the company demands a full-time CEO. The resignation of Alvin Tan is at the request of the CEO as he was a nominee of the outgoing CFO, Alan Winduss. This still seems a bit unusual to me but not an incredible explanation.


A response has been made to the FINRA inquiry. I personally never took the FINRA inquiry too seriously. A person trading on inside information could be in trouble but I wouldn't expect more than a small fine and a warning to the company if they let some information slip out.

In reviewing 10-K's for the last 10 years I don't see any sign of self-dealing or self-enrichment on the part of the CEO or the CFO. Gene Kostecki is paid a $150K salary and of course gets the 2% royalty as well. There's no stock options or bonuses paid to the CEO and the share count has been constant for many years. The CEO owns over half the shares outstanding and has not bought or sold shares for years. The outgoing CFO owned 11% of the shares himself and was not a trader of the stock either. They've had plenty of opportunity to profit as the stock has bounced between $0.20 and $3.00 and they haven't taken advantage of their inside knowledge. I find their salaries reasonable and believe Gene has done a reasonable job building the business. I believe Gene's two sons work in the business but I don't know any details on their compensation.

I believe with the addition of the new CFO some changes have taken place. I suspect he advised that more onerous Sarbanes-Oxley requirements were kicking in beginning with the fiscal 2011 year beginning Oct. 1, 2010. This explains going dark at the end of September. The company has decided to use existing cash and cash flow for the Indonesian land purchase and mill construction rather than an equity raise at depressed prices. [...]

In conclusion, I find this situation fraught with uncertainty but not fraught with risk. The below book value stock price more than reflects the mill performance risk and the resignations and investigations don't amount to much. Management has skin in the game here too which reduces the risk of long-term self-enrichment without creating shareholder value. The upside is big as the business can be a cash machine [elsewhere in the write-up the author breaks down why he thinks it can be a cash machine].

Risks:
1. There may be some fire creating all the smoke


2. Competition could arise especially as key patents expire in about 5 years


3. This is a tiny company run by an Australian engineer and not a professional business manager. Hopefully the new CFO will mitigate this risk.

4. Rumors are that Australian wear-plate competitors are cutting prices to try to regain some market share in Western Australia. This may put pricing pressure on Alloy's margins.


5. The apparent difficulties with the new mill could be prolonged or result in poor quality product that damages the company's reputation.