Although earnings fell 83% yoy to $0.7m, it was still above our expectations of $0.5m. Excluding a forex hedging loss of $0.4m, underlying earnings was $1.1m, down 74% yoy. We highlight that 1Q09 results form only 7% of our full year forecast as we expect subsequent quarters to show sequential improvement.

Revenue fell 30% yoy to $32.8m as no product segments were left unscathed by the economic slowdown. Office automation, consumer electronics, automotive and data storage revenue fell 40%, 34%, 25% and 23% respectively. Although data storage revenue fell, rubber sales were fairly robust, down 12% yoy as Armstrong had taken market share from a competitor in earlier quarters.

We expect 2Q to be better than 1Q, with the automotive and data storage segments likely to take the lead. China’s auto market has grown robustly in the past five months as sales were boosted by stimulus policies. Apr set a new sales record of 1.15m vehicles, up 25% yoy. Armstrong’s China auto business posted yoy growth in 1Q despite the slowdown elsewhere. Data storage should also respond to the pickup in consumer sentiment.

Balance sheet continued to be well managed. Net cash was $19.4m, stable on both a yoy and qoq basis, despite a slightly longer cash conversion cycle (1Q09: 122 days, 4Q08: 98 days).

We are maintaining our full year forecast of $10.5m as we expect sequential improvement for the next three quarters. Armstrong remains a well-run company with ample growth prospects once it gets through the current downturn. Our BUY recommendation stays, with a revised price target of $0.25, based on 12x FY09 P/E.