Name: AM Castle & Co. (CAS)
Web Site: http://www.amcastle.com
Brief Description: A. M. Castle & Co. distributes specialty metals and plastics serving the North American market. It provides carbon, alloy, and stainless steels; nickel alloys; aluminum; copper; and brass in various forms, including round, hexagon, square, and flat bars; plates; tubing; and sheet and coil. Through its subsidiary, Total Plastics, Inc., the company also provides various value-added industrial plastics.

ANALYST OPINION: Since we assigned Buy rating to AM Castle & Co. (CAS) on November 25, 2005, its stock price jumped by 47%. Nonetheless, we believe CAS is still undervalued. Since 2004, CAS has reported strong operating improvements including: solid revenue growth, breakeven and a steady rise of operating net margin, decline in indebtedness level. 

VALUATION: Based on DCF, P/E, and P/S valuation we have assigned a price target of $39.2 per share of CAS (32% above current price).

Strong revenue growth in FY04 (+40% yoy) and 9moFY05 (+30% yoy) after almost flat sales yoy in FY03. The revenue growth was driven by both material price increases (largest impact on revenue growth) and real volume sales.

CAS broke even in FY04 and continues to report a solid improvement in operating margin (+6.9 percentage points in FY04 and +3.2 percentage points in 9moFY05). Theoperating success is a result of thestrong revenue growth and p ermanent cost saving initiatives during the last several years.

CAS continues to report a decreasing indebtedness level and recently refinanced its long-term senior secured notes. The debt-to-equity ratio declined from 0.95 at the end of FY03 to 0.49 at the end of Q3FY05. CAS expects a $5.1 Mn charge in Q4FY05 related to the refinancing and annual interest savings of about $1.9 million.

CAS has a well diversified customer base, large distribution network. CAS serves a wide range of industrial companies from United States (93% of sales), Canada and Mexico, including many Fortune 500 companies as well as thousands of medium and smaller sized firms. No single customer accounted for more than 3% of total sales.

In December 2005 Chairman and CEO of CAS announced it expects strong end-markets in 2006. The particular strength is expected in the oil and gas, aerospace, mining and heavy equipment sectors.

In January 2006, CAS replaced Mr. G. Thomas McKane with Mr. Goldberg - new President and CEO to “lead A. M. Castle into its next phase of development”. Mr. Goldberg has 26 years of global metals industry experience in the UK, Canada and US. Most recently, he served as Executive VP of Integris Metals, an aluminum and stainless steel metals service center business with 2004 revenues of $2.0B.

Weak internal control. Independent auditors stated that “as of December 31, 2004, management had not implemented the procedures and review processes required in order to complete accurate and timely reconciliations of its inventory counts to the general ledger”. As a result of the institution of the improved procedures in H2FY04, material inventory adjustments reduced after tax earnings by $1.0 Mn in Q3FY04 and $2.4 Mn in Q4FY04.

Performance vulnerable to economic cycles.

11/25/2005 - Assigned Buy rating