Paulo Santos, Idea Generator (1,462 clicks)
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Alloy Steel: Q2 FY2015 Earnings May. 15, 2015 6:05 PM ET | About: Alloy Steel International, Inc. (AYSI) by: Paulo Santos
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AYSI over the next 72 hours. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Alloy Steel posted Q2 FY2015 earnings.
They were much, much better than expected.
As a result, I struggle to find any stock that's cheaper out there. But still, the mining weakness "story" gives me pause. I will be trying to buy on weakness.
I was both right and wrong in my latest article covering Alloy Steel International (OTCPK:AYSI), titled "Alloy Steel's Q1 FY2015 Earnings Are Out, Here's What They Mean". I was right because weakness in the mining sector in general allowed for a better entry point for someone reading that article. I was wrong because:
There was no weakness in Q2 FY2015;
I didn't buy the stock when it was weaker.
I still like Alloy Steel, it was never a question of liking the company or not, but the truth is that I should have bought into it when it was weaker, as the stock went down nearly 20% since the previous earnings report (Q1 FY2015), and today after reporting on Q2 FY2015 it's trading quite a bit higher ($1.48 as I write this).
Anyway, here are the main takeaways from Q2 FY2015 earnings:
Revenue growth came in much better than expected, with revenues up 39.6% from Q4 FY2014. No weakness to be seen here.
As a result of the revenue strength, operating earnings were also up 118%, also helped by significant containment in SG&A expenses. Alloy Steel doesn't offer much detail, so it's hard to know what prompted such a decrease in expenses, though.
The only negative that I can see was a drop in gross margin from 60.2% of sales to 53.4% of sales.
Ultimately, Alloy Steel posted a $0.16 EPS for the quarter, versus $0.056 in Q2 FY2014. This was in excess of 186% growth.
Also noteworthy, Alloy Steel's share count remained unchanged at 17.35 million shares. If only there was a policy put in place to remunerate shareholders, this would be even more extraordinary in a market filled with dilutive companies.
The improvements didn't stop at the P&L. They extended to the balance sheet. Cash was up a significant $2.95 million in the quarter, with a drop in inventories plus expansion of accounts payable being responsible for half of the improvement.
Even with today's higher share price, the cash on hand still represents 45.6% of the market capitalization.
And of course, the company is so profitable and so flush with cash that it's trading at just 4.3x TTM earnings or 2.3x TTM earnings if we exclude cash.
What this all means is that AYSI remains extraordinarily cheap. And I remain wary of chasing it, but will take weakness as a chance to buy back in. If not weakness from the mining sector, then perhaps the overall market. We'll have weakness at some point. AYSI is clearly a candidate to buy then.
One More Thing
There is a good explanation for why AYSI might not be as exposed to the mining industry's weakness as other capex suppliers. This explanation was first advanced by Butterfield Capital in my previous article. It can be summed up this way:
The product AYSI sells wears with usage (they're wear plates, after all). Usage is proportional to the volume coming out of the mines. And the pricing drops mining companies are seeing are much larger than any volume drops. Indeed, at times there aren't even any volume drops.
This means those wear plates keep on wearing off and need to be substituted on a regular basis. This in turn means that AYSI is less exposed to the mining cycle than other capex suppliers whose equipment does not wear off with proper maintenance. We could say that AYSI's product is a "consumable" capital good.
As such, not much weakness can be expected in AYSI's business, thus my error in not buying back in close to $1.00 while I had the chance. I hope not to commit this error twice, so I'll try buying on stock price weakness, not expecting too much in the way of fundamental weakness (though some can always happen as AYSI's business looks very lumpy).
Conclusion
There was much to like in AYSI's latest earnings report. Growth was much higher than expected, earnings were incredible, no weakness could be found, the balance sheet improved a lot and the stock remains massively cheap. I will still try buying on weakness, but I can fully understand those who might be tempted to chase.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Source: Alloy Steel: Q2 FY2015 Earnings
Additional disclosure: I might also wait more than 72 hours to try and buy it, of course.
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