Armstrong reported net profit of $3m in 2Q09 (+347% QoQ, -38% YoY), as earnings staged a strong rebound from the very depressed level of 1Q09, led by a reflation in hard disk drive shipment volumes during the quarter while its automotive business in China continued to benefit from the PRC government’s industry stimulus measures. No interim dividend was announced. The results are within market expectations.

Revenue grew 27% QoQ to $42m. All segments reported positive QoQ growth but only HDD reported positive YoY growth (+16%) as Seagate and WD shipments rebounded smartly in 2Q09. The other segments fell 11-23% YoY. The 11% decline in automotive sales was the smallest as it benefited from strong domestic demand in China, although this was not enough to offset weak Auto sales in Thailand and Singapore.

The 2Q09 results also included an abnormally large forex loss of $3.4m (normally less than $0.5m in past quarters) which was mitigated by a $3m writeback of past mark-to-market provisions. This loss is related to the unwinding of the US$ cashflow hedging contract entered into last year and does not mean it made less than the reported profit. 3Q09 will still show a forex loss, albeit smaller, as the contract is fully unwound.

While sales in other segments still fell YoY in 2Q09, we understand monthly sales are closing the gap and YoY growth should return in 2H09. Other than continued strength in HDD, Automotive should get a fillip from pent-up demand in China where vehicle buyers now have to wait several months for delivery. Even Peugeot, which was hit by political problems in 1H09, have started to order more from Armstrong.

We have raised FY09 forecast by 23% on a stronger Auto assumption. FY10-11 forecasts have upside potential as a new high-value car seat part for VW has been approved for production but we have not yet factored this into our forecasts. At 12x FY09 earnings, valuations have risen with the market but appetite for good quality manufacturing stocks has also risen. Look to any pullback to build a long position.