Following on from a better-than-expected first half to 30 September 2014, ALS Ltd (ASX: ALQ) again surprised the market on Friday by revealing that its third quarter results were again ahead of expectations.
The company earned $46 million in net profit after tax for the third quarter, 15% higher than the $40 million forecast, but basically flat on last year's earnings.
Management was pleased to see that margins improved substantially following cost-savings initiatives, even though revenue was slightly down across most of the company's sectors.
Overall ALS' profit is down on last year, with the first half lagging the first half last year by 33% even though this quarter remained flat.
There is also significant uncertainty with the upcoming fourth quarter (4Q), and management declined to make guidance due to the fact that 4Q is the traditional off-season for mineral exploration, sees lower activity due to winter in the northern hemisphere, and will experience volatility due to low oil prices.
I like ALS' consistent under-estimation of results. It is better to be conservative and forecast on the safe side, and this mindset will serve investors well in a volatile commodity environment (minerals make up a good portion of ALS' business).
Management is also relying on the business' diversification and scale to provide staying power in challenging market conditions. I also think this is the correct approach, and ALS does have a respectable business model with good exposure to diverse industries.
However as an investor I would be waiting for another six months at least to see how the business progresses into 2015.
Barring an absolutely outstanding 4Q performance, ALS' full year results are going to be lower than they were last year.
Thus to my mind, the next three months are kind of valueless (unless they're outstanding) in forecasting the company's future.
I really want to see how the first 3-6 months of the next financial year shape up before making an investing decision – these were the two quarters where ALS really struggled in the current financial year.
Investors impressed with management's conservative approach should take a leaf from their book and take the same approach to ALS Ltd.
