Material Sciences: Small Company to Post Big Earnings

With the current metals bull run, we forget that these types of runs can move into other areas connected to the commodity. Sometimes the groups that surround these areas have much more to gain than the commodity itself as their underdeveloped infrastructure can be much worse than the sector everyone is talking about.

Coal is a great example, with respect to Appalachia. This is important because coking coal is needed to fabricate steel and more importantly low sulfur high BTU coal can now be used for the same purpose. Companies like Alpha Natural (ANR) and CONSOL Energy (CNX) look to grow massively and that is all hooked to the steel trade.

Another area is steel recycling. Many countries, especially Europe are mandating its use for the purpose of getting greener. Now with the increased usage many of these companies are seeing price increases more along the lines of the steel manufacturers.

With reference to steel, in my opinion, there is no better company than ArcelorMittal (MT). This company continues to set the bar in the industry. They recently signed a contract with Material Sciences Corp. (MSC) to provide steel coatings for the purpose of sound insulation and corrosion resistance. This company flies under the radar because of its small market cap, but could realize amazing growth going forward, or better yet gets purchased. Since they are only expected to break even this quarter we could see some interesting movement and easily see a major beat with respect to earnings.

MSC is a company that is not only strong in the United States but also Asia. This presence in Asia looks to add growth. A large part of their business is in construction and could see better than expected growth as China continues to build. There is very little info on this stock, but my main hypothesis of their beating earnings estimates is based on growth overseas, their sector consistently beating earnings this quarter, and their contract with MT.

Looking at their current chart it is very bullish. There was a double top breakout on May 7th and the current trend has the stock going to $14. That will take some time, but I think they will have a pop tomorrow. Also, when I took their money flow and superimposed it over their chart I saw that when money flow was higher than 80 with respect to the index, the stock generally has a pretty good run. It has happened several times and usually is the sign of a run in the stock with respect to peaks. 1995 and 2004 are both examples.

Looking at the one year chart the money flow index hasn't hit this point in a year and they are on the edge of hitting that mark. They also broke out of their 50-day moving average which is a very bullish sign with respect to all charts. The fact that a bunch of money rolled into the stock today is also good. There was also massive volume Tuesday at a little before 3pm. After hours was also active. Volume for the day was 25% higher than average over the past 3 months.

Current quarter analyst estimates have the stock breaking even this quarter on revenue of $55.2 million. This is a 6% decrease over last year's revenue while earnings were $.09 the first quarter of 2007. They have missed on earnings for the last three quarters, but they beat earnings by 250% the first quarter of last year, and I believe the same will happen tomorrow. Look for the stock to post earnings of $.02 per share and this will make a major move in the stock.

Disclosure: None

Comments

[peregrina:]

Son, is that egg all over your face? These opportunities to learn humility are precious. Be grateful, and hope that no one took your advice.

2008 May 14 08:26 PM

[Mike Stathis:]

LOL Peregina, that made me laugh!! But please try to be more constructive, as we are human and no one is perfect.

Okay here's my take. With all due respect, the fundamentals look potentially promising, but only for risk-averse, long-term investors. The big concern I have right now are the miserable profit margins. Management will need to turn that around or else they won't do anything.

As far as technicals, I can't see the "very bullish" pattern you mention. In fact, short-term, it has significant downside as it just broke through the 50 DMA.

"They have missed on earnings for the last three quarters, but they beat earnings by 250% the first quarter of last year.." That should serve as an indicator. As far as last year in concerned, that was last year - a year that saw the Dow surpass 14,000, a year in which the real estate and banking fall out had just begun, a year when global inflation was not yet detected, etc.

Be careful using generic chart patterns (double tops, etc.) as indicators. Ofetn they can do more harm than good. I personally don't pay attention to them. I look at basic charting elements. If you know how to read charts, you won't have a need to look to spot these generic patterns (preached by IBD to novices) to spot bull/bear trends.

2008 May 14 09:53 PM

[dixie:]

If you examine a 10 year history of MSC you will be left with but a single word, DISAPPOINTMENT. This Company has missed most of its targets, incurred accounting irregularities, and negative restatements of prior earnings. They have fumbled away many opportunities.

The author of this article should dig deeper and forget his charts.

2008 May 14 09:56 PM

[legmaker:]

Peregrina,

You are right about the call it was, bad but seemed to have more upside than downside, and I love to try and make the call. Trust my judgement at your own risk, as that is what it is risk. Thanks for your comments, they dissappointed again. Have a good one.

2008 May 15 03:25 PM

[legmaker:]

Biggest miss I have had in a while, please check out my blog for others if you are wondering. I have been on PWAV before earnings and that is up 19% in 12 days. www.updown.com/display...

Thanks for the comments, cant win them all.

2008 May 18 11:56 AM