AYSI at earnings inflection point

Back in February of 2008 I posted the following article on Alloy Steel and their disruptive wear plate technology focused on the mining industry

http://seekingalpha.com/article/65923-alloy-steel-international-explosive-growth-at-a-reasonable-price

Not too long after that we experienced financial armageddon. The mining supply industry took a huge hit including companies like Joy Global. AYSI was no exception and the company went the from rapid sales growth to rapid sales contraction as we saw an economic perfect storm unlike anything we have seen in 80 years. Fast forward to 2010 and the company is continuing where it left off in 2008 and is once again growing rapidly with a blue chip customer base, huge earnings leverage, and plans for more expansion coming on line.

Referencing my previous article what is special about AYSI's product is that they produce a thicker higher quality plate that lasts longer at a price point similar to other products. As a result they inked a 5 year supply deal with BHP Billiton in September 2009 that the company is estimating at 50 million dollars over 5 years. They also recently announced a $900,000 contract with SynoHydro a billion dollar Chinese corporation. Entry into large respected blue chip clients especially BHP at such a meaningful level validates the game changing nature of the product.

The other interesting thing to note is how quickly the company was able to fill new capacity with new demand. Back in 2008 when I wrote about the company they were planning a second production mill to effectively double capacity. After all of the turmoil in the financial markets that mill began producing product in August 2009. The announcement that the mill entered production came on August 18th 2009. On September 8th 2009 exactly 3 weeks later the company announced that the mill was operating at full capacity.
Subsequently the company announced plans for yet 2 more mills and another doubling of capacity in the first part of 2010. A perusal of their most recent 10Q filing suggests that this new capacity is currently under construction. The company had unusually high capex spending of around 350k in their most recent quarter which matches their stated cost of the previous mill and the capex spending that appeared in the cash flow statement when mill 2 was being constructed.

At this point its worth noting the recent results the company has achieved. In their most recent quarter they produced record sales of 5.8 million dollars up roughly 200% YOY in a seasonally weak quarter. Q3 is when the company does their annual shutdown and maintenance. Those sales resulted in record quarterly EPS of .087/share and cash from operations of 2.6 million dollars or .15/share. Its no surprise the share price hit a recent 52 week high of 3.15/share. Of course as usual they have done this with disproportionately low growth in expenses and overhead and have still never diluted a single share in the companies history.

With more potential capacity coming on-line shortly and given their ability to leverage new capacity very rapidly into profitable sales I believe the company is sitting at an inflection point for earnings and share price.

MPAA called the earnings right reaction wrong

Turns out I called the eps of .18 on the button or almost on the button given I said .17-.18. Unfortunately I failed to call a "so what" reaction from the market. It sure looked pretty solid to me with operating cash flow of over 1.00/share.

I guess everyone else was expecting more in a seasonally weak quarter.

MPAA earnings out Monday

One thing about blogging on investments is it lays out your successes or failures for everyone to see. That said I'll lay out my case here for MPAA which reports Monday morning. I really liked this at 5. I also think its a decent bet at 5.80

MPAA's business is to buy broken starters and alternators then mix and match the parts to rebuild them into working refurbished units. These are then sold primarily into the big auto parts stores like Autozone. The leftover pieces are sold as scrap. I like where the company is situated for both their competitive position and the macro factors in the business. I also think the price is quite reasonable and has pretty good upside with modest downside risk.

First discussing the competitive position here I believe there are meaningful barriers to entry for competitors. In order to supply their customers they need to keep large inventories consisting of virtually every startor motor and alternator imaginable. This leaves them with alot of inventory on the balance sheets about 65 million to be specific which is a huge amount of money tied up in inventory but it also serves as a barrier to new competition. That has left them in the position of being able to sew up long term contracts with the large auto supply stores. Given the exclusive nature of some of those contracts and the costs involved in building up inventories it will be difficult for new competitors to pop up on a similar scale.

Second the macro picture favors the company in a couple of areas. First the company benefits from 2 trends. The slowly improving economy is resulting in more miles being driven . That results in more part replacements. Second the vehicle fleet is aging as consumers drive their cars longer. Both of those should be beneficial for MPAA. The other larger trend to note is a general improvement in scrap prices. Scrap prices fell apart in 2008 but have been consistently strengthening. See the chart below from www.scrap.net.

This should be a beneficial trend for their gross margins which cratered down to 20.1% in the March 09 quarter but have since recovered back to 27.4% in their most recent quarter.

In terms of earnings the company earned .28 last quarter helped in part by currency gains and a 1 time item. I get normalized EPS of .17 last quarter. Going forward the company has several things that could improve growth outside of the general trends. They completed an acquisition last quarter that was not fully felt on the income statement and should improve eps going forward. They also have some initiatives to move into the heavy equipment market. That seems to be an obvious complementary business that should offer opportunity for growth.

The current quarter is normally a bit weaker due to seasonality but I think the impact from the acquisition may bring revenues close to inline with last quarter. I am also looking for eps of .17-.18. If they make that number or better I think you should see some additional appreciation. My targets are modest but I am looking to see the stock move to the 8.00 range with a solid report.

Lets see if this turns out to be right.

HKFI sleeper earnings

Bought some hkfi today on what appears to be an unrecognized quarter. Shares are at 3.25 right now. Per their 8k filed monday it appears to me they earned about .30/share for calendar Q4

This could be an opportunity for a quick profit on a good earnings report. Seasonality exists in this so if they put out a good number and get a pop it might be good to exit