Haynes International develops, markets, and manufactures specialty alloys for aerospace, chemical processing, gas turbines, power generation, incineration, industrial heating, hazardous waste, ect. These alloys are manufactured in several forms: sheet, coil, plate, forgings, fasteners, bar, wire, billet, tube, as well as value-added custom cuts and forms.
The Companies customers are very diverse including GE, Rolls Royce, Boeing, DuPont, Dow, Eli Lilly, BP, and many more. The manufacturing occurs in the US (Ind., La., NC.) with 6 US Sale/Service centers and 7 international (Eng., Fra., Italy, Switz., India, China).
As of the last conference call, the company was operating at +100% operating capacity for flat alloy products (accounting for 70% of profits). The Company claims to have "big demand for value-added service" and is "moving up the value chain" in their niche markets. Moving into this model can grown the companies moat and competitive advantage. By continuing R&D, becoming critical partners with their customers, and increasing value-added products the Company can protect their weak moat.
The valuation for this company is attractive on traditional metrics.
Market Cap: $520
P/E: 7.5
ROE: 28.26
D/E: 0.12
Net Margins: 11.81%
Yield: 0%
EPS: $5.88
BV/Share: 26$
The stock is down nearly 50% in the past three months (in the bottom 10% of the market). This scary drop opens up an opportunity for long-term investors. Here are several return scenarios using a discounted EPS valuation. The models conservatively estimate EPS at $5 with a 10% discount rate:
Scenario 1: 2% growth in perpetuity = $63
Scenario 2: 6% growth for 4 yrs. followed by 2% in perpetuity = $73
Scenario 3: 10% growth for 5 yrs. followed by 2% in perpetuity = $88
*This model assumes no further dilution.
Notes:
As a small company, HAYN is always subject to take over speculation. They pose a nice value to the massive multinational steel companies.
The price of nickel (needed for nickel-alloys) is driven by the stainless steel markets.
Third Avenue Value is a holder of the company.
The Company is a provider to Boeing but hes very low exposure to the 787 Dreamliner.
The company has a decently sized short interest.
Monday, January 28, 2008
Wednesday, January 9, 2008
Super Value: A Name that Fits (SVU)
Super Value, a grocer, pharmacy, and grocer logistics company with 2,478 stores announces a 25% increase in year over year earnings. What happens?
The stock drops almost 20% in two days. Why? The CEO did something really stupid and short-sighted: He was honest about the state of inflation, food prices, and the US consumer.
While SVU drops from $34 to $27, Kroger a competitor in the exact same sector, tacks a $1 on to its share price. While the CEO of Super Value speaks honestly, a competitor facing the same expensive wheat, corn, meat, dairy, ect. remains stable in the face of a large market sell-off.
This rapid sell-off has over shot dramatically. No matter what happens to inflation - PEOPLE HAVE TO EAT. At the current price, SVU represents a dreary sentiment for growth in earnings. The current price assumes the company will grow earnings 0% for the next five years followed by an future growth rate of 1% (10% discount assumed, DFCF).
Apparently, no one bothered to look at the financials. Debt is abnormally large at the moment because SVU is paying for its acquisition of Albertson's, a high-end grocer. As debt is paid down, the Company can convert more of its cash into shareholder earnings.
Sales could remain level for years as debt is serviced and EPS will grow more than 0-1%. The current price is too pessimistic. Assume a modest and organic increase in sales over the long term and its not hard to imagine Super Value growing earnings at a more impressive rate.
Assume SVU grows earnings at 0.5% for the next three years, then 2.5% thereafter, you have a $35 stock on your hands. For your trouble, SVU currently has a 2.3% dividend.
The stock drops almost 20% in two days. Why? The CEO did something really stupid and short-sighted: He was honest about the state of inflation, food prices, and the US consumer.
While SVU drops from $34 to $27, Kroger a competitor in the exact same sector, tacks a $1 on to its share price. While the CEO of Super Value speaks honestly, a competitor facing the same expensive wheat, corn, meat, dairy, ect. remains stable in the face of a large market sell-off.
This rapid sell-off has over shot dramatically. No matter what happens to inflation - PEOPLE HAVE TO EAT. At the current price, SVU represents a dreary sentiment for growth in earnings. The current price assumes the company will grow earnings 0% for the next five years followed by an future growth rate of 1% (10% discount assumed, DFCF).
Apparently, no one bothered to look at the financials. Debt is abnormally large at the moment because SVU is paying for its acquisition of Albertson's, a high-end grocer. As debt is paid down, the Company can convert more of its cash into shareholder earnings.
Sales could remain level for years as debt is serviced and EPS will grow more than 0-1%. The current price is too pessimistic. Assume a modest and organic increase in sales over the long term and its not hard to imagine Super Value growing earnings at a more impressive rate.
Assume SVU grows earnings at 0.5% for the next three years, then 2.5% thereafter, you have a $35 stock on your hands. For your trouble, SVU currently has a 2.3% dividend.
Friday, January 4, 2008
Reverse Engineering Capital Southwest Corporation
In an effort to become a better stock picker, it helps to understand the thinking and reasoning of the best. Leucadia National has an excellent reputation for finding companies, both public and private, in distressed sectors, locations, or business situations and having the patience to see past the current troubles.
In that vein, I enjoy looking at its recent equity purchases and trying to figure out what is so appealing about each company. The most recent purchases for LUK include: CSWC, GEIO, and UWBK. These companies were purchased between August and November of 2007. GEIO went through a merger during that period making it difficult to know when LUK got involved. UWBK is a bank and I find it difficult to understand and value a blind pool of assets and its management. This leaves us with CSWC, one of Forbes’ “100 Most Trustworthy Companies”.
Capital Southwest Corporation’s Business
CSWC is classified as a close-ended equity fund but this is isn’t a complete description. CSWC acts as an equity investor, a venture-capital firm, a capital allocator, and manager of its wholly-owned subsidiaries. Formed in 1961, CSWC is now considered the largest public venture-capital firm. The company’s “Investments are focused on opportunities for capital appreciation derived from expansion financings, management buyouts, recapitalizations, industry consolidations and early-stage financings.” (2007 Annual Report) The company looks for proven companies with experienced management and they (unlike most venture capital) don’t go in with an exit strategy. This means they are seeking to form long term partnerships to last the lifetime of these companies. A quick look at annual reports shows that CSWC still holds positions in investments initiated in the ‘60’s and ‘70’s. The portfolio is relatively concentrated with 87.4% of its net worth ties to just eight companies; including: RectorSeal, Media Recovery, Lifemark, Whitmore, Heelys, Palm Harbor Homes, Encore Wire and the Alamo Group.
Figures
The traditional statistics for determining value would lead an investor to believe this company is being undervalued.
Debt = $0
Price/Book = 0.84
Current P/E = 3.5-4.5
5 yr. ROE = 17.2%
ROE = 28.5%
ROC = 28.5%
No analyst coverage
52 week low = $105.16
Purchase Reasoning
A company holding that holds a mix of private and public equity in profitable businesses is compelling when selling below book. This begs the question “Why?” A few factors are dragging CSWC’s short term prospects down. Investments in Palm Harbor and Encore Wire have to be adversely effected by the housing market; earnings will drop in the face of a slumping housing sector. Also, some of the company’s manufacturing interest will hurt from slow downs in housing, autos, and transportation. Another factor weighing on investors are several changes in management and a delay in the most recent quarter’s earnings. On top of that, the Company did only one major deal in fiscal 2007, claiming that their was too much money chasing too few deals. I view this as a long term positive.
The biggest material loss may be caused by the massive drop in the stock price of Heely’s since this summer, dropping from $25 to $6 and change. Heely’s provided the largest gains for CSWC in the most recent years. That’s a lot of uncertainty and negative news for a company that is delaying this quarters data. The suspense is painful.
So why buy now? While selling a discount to last quarter’s calculation of book value, the price is probably even with current book value. This price lets an investor own a diverse base of businesses at cost with potential for appreciation once the housing downturn eases. The free lunch is that you pay no premium for the skills of management who will thrive in a low-credit environment. For CSWC, this provides a situation where too little money chases a fair number of deals.
Buying CSWC in today’s environment is a high-uncertainty yet low-risk opportunity. It’s difficult to know how the company will perform in current market conditions but at it’s current price range, CSWC is supported by the values of its underlying businesses. Hopefully, over the long term, CSWC can prove to offer a strong upside with less risk. It may be worth waiting for the delayed quarterly data and buying on what many expect to be bad (short-term) news.
In that vein, I enjoy looking at its recent equity purchases and trying to figure out what is so appealing about each company. The most recent purchases for LUK include: CSWC, GEIO, and UWBK. These companies were purchased between August and November of 2007. GEIO went through a merger during that period making it difficult to know when LUK got involved. UWBK is a bank and I find it difficult to understand and value a blind pool of assets and its management. This leaves us with CSWC, one of Forbes’ “100 Most Trustworthy Companies”.
Capital Southwest Corporation’s Business
CSWC is classified as a close-ended equity fund but this is isn’t a complete description. CSWC acts as an equity investor, a venture-capital firm, a capital allocator, and manager of its wholly-owned subsidiaries. Formed in 1961, CSWC is now considered the largest public venture-capital firm. The company’s “Investments are focused on opportunities for capital appreciation derived from expansion financings, management buyouts, recapitalizations, industry consolidations and early-stage financings.” (2007 Annual Report) The company looks for proven companies with experienced management and they (unlike most venture capital) don’t go in with an exit strategy. This means they are seeking to form long term partnerships to last the lifetime of these companies. A quick look at annual reports shows that CSWC still holds positions in investments initiated in the ‘60’s and ‘70’s. The portfolio is relatively concentrated with 87.4% of its net worth ties to just eight companies; including: RectorSeal, Media Recovery, Lifemark, Whitmore, Heelys, Palm Harbor Homes, Encore Wire and the Alamo Group.
Figures
The traditional statistics for determining value would lead an investor to believe this company is being undervalued.
Debt = $0
Price/Book = 0.84
Current P/E = 3.5-4.5
5 yr. ROE = 17.2%
ROE = 28.5%
ROC = 28.5%
No analyst coverage
52 week low = $105.16
Purchase Reasoning
A company holding that holds a mix of private and public equity in profitable businesses is compelling when selling below book. This begs the question “Why?” A few factors are dragging CSWC’s short term prospects down. Investments in Palm Harbor and Encore Wire have to be adversely effected by the housing market; earnings will drop in the face of a slumping housing sector. Also, some of the company’s manufacturing interest will hurt from slow downs in housing, autos, and transportation. Another factor weighing on investors are several changes in management and a delay in the most recent quarter’s earnings. On top of that, the Company did only one major deal in fiscal 2007, claiming that their was too much money chasing too few deals. I view this as a long term positive.
The biggest material loss may be caused by the massive drop in the stock price of Heely’s since this summer, dropping from $25 to $6 and change. Heely’s provided the largest gains for CSWC in the most recent years. That’s a lot of uncertainty and negative news for a company that is delaying this quarters data. The suspense is painful.
So why buy now? While selling a discount to last quarter’s calculation of book value, the price is probably even with current book value. This price lets an investor own a diverse base of businesses at cost with potential for appreciation once the housing downturn eases. The free lunch is that you pay no premium for the skills of management who will thrive in a low-credit environment. For CSWC, this provides a situation where too little money chases a fair number of deals.
Buying CSWC in today’s environment is a high-uncertainty yet low-risk opportunity. It’s difficult to know how the company will perform in current market conditions but at it’s current price range, CSWC is supported by the values of its underlying businesses. Hopefully, over the long term, CSWC can prove to offer a strong upside with less risk. It may be worth waiting for the delayed quarterly data and buying on what many expect to be bad (short-term) news.
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