Alloy Steel going to the Pink Sheets

After the close Monday, Alloy Steel International announced its “…voluntary filing of Form 15 to suspend SEC reporting obligations”. The company noted in its press release that it will continue to file audited annual reports and will post unaudited quarterly reports on its website in lieu of filing 10-Qs, and that it anticipates its shares will trade on the Pink Sheets.

This is disappointing, but given the valuation the market has assigned the stock recently (as of yesterday’s close, the company was trading at less than 5x its trailing earnings), one could see why the company would be reluctant to incur the current compliance costs of a Bulletin Board listing, let alone the higher costs it says it would have to pay next year as a result of Sarbanes Oxley. Recall the company’s comment on last month:

The Company is reviewing its growth strategy and how to fund it. No decision as to method has been made as yet. If the company wanted to fund accelerated growth through an equity raising common sense suggests that a higher share price is required to ensure dilution is minimized.

Moving to the Pink Sheets suggests that the company has ruled out raising additional capital via a secondary offering1. Whether the company intends to try to raise additional capital from some other source to fund “accelerated growth” (perhaps via an investment from one of its large mining company customers?), or whether it intends to continue growing organically, using its cash flow to finance expansion, would be interesting to find out. Perhaps the company will elaborate on this at some point.

In the meantime, my estimate of the company’s fiscal ’11 earnings (~17 cents) hasn’t changed, and as of Monday’s close the company was trading at about 4.76x that estimate. It looks cheap here, but it may get even cheaper as investors react Tuesday to the company’s imminent move to the Pink Sheets2. If it does, I may pick up a few more shares.

1This brings to mind former Nasdaq Vice Chairman David Weild’s letter to the editor of the Financial Times last month about how equity market structure doesn’t serve the needs of small companies or fundamental investors to the editor of the FT:

The US stock market is in secular decline. We have 40 percent fewer public companies today than at the peak in 1997. When SEC Commissioner Kathleen L. Casey asked a panel of trading experts during the SEC panel discussions on equity market structure: “Have small cap stocks experienced liquidity benefits from electronic trading?” almost to a person these experts said: “No, they have not.” This is troubling because 70 percent of public companies are smaller than $250 million in market value — smaller than “small cap”.

Increasingly, it is clear, the stock market caters to the interests of a few — large trading concerns and large investment banks — while undermining the interests of small public companies, small broker dealers, fundamental investors [...]

2It’s worth noting, in Alloy Steel’s case, that its move to the Pink Sheets is voluntary. One of the main reasons there are negative connotations associated with the Pink Sheets is that that’s where companies headed for bankruptcy end up (although the Pink Sheets are also home to some solid companies — including a few foreign multinationals — that don’t want to incur the compliance costs of an exchange listing). Bankruptcy doesn’t seem to be a likely outcome for Alloy Steel in the though: Alloy Steel has an Altman Z-Score of 5.13, which indicates financial strength and little likelihood of financial distress within the next two years.

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