China Armco Metals (NYSE AMEX:CNAM)

GeoBargain CNAM reported third quarter results this morning. EPS results were not near as strong as expected.

Currently, China Armco derives all of its business by acting as the middle man between suppliers and buyers of steel.  The Company makes its profit on the “brokering margin” it makes when it resells to the buyers of steel products. In our article on November 20, 2009, we postulated that CNAM would report a nice quarter due to pre-announced order bookings for the third quarter and a stabilization in steel prices. As it turns out, sales did beat our expectations and steel prices did remain stable. Unfortunately, the companies “brokering margins” suffered. Apparently there was some give back in margins that were abnormally high associated with a surge in steel prices from the 2009 first to second quarter.  Also, CNAM's distribution business has the tendacy to be fueled by orders from a few customers, so it is possible that unfavorable pricing on a contract to one customer could affect margins. Results also took a hit from a one time tax adjustment that we view as a non-operating factor. 

The good news is the China Armco issued year end guidance that infers a very strong 4th quarter and offered bullish comments about 2010. Otherwise, a decision to keep CNAM as GeoBargain would have been a challenging decision. The stock may take a short-term hit, but it has always been a 2010 story, which is when its new recycling business will kick in.  This should give the Company a new source of revenue and diversify its customer base.