Summary
Basil Leaf Capital rates a BUY. The growth rate projected at its current valuation makes this an attractive investment. The talent in R&D and manufacturing in an industry that is important to high growth industries gives this company a great opportunity to grow. This investment will be volatile because it is a small cap company and is heavily dependent on raw material costs of cobalt and nickel.
Understanding Haynes International as a Business
Haynes international is a leading developer, manufacturer, and distributor of high-performance nickel and cobalt based alloys for use in high temperature and corrosion applications.Haynes has manufacturing facilities in Indiana, Louisiana, and North Carolina.
The revenue of this company is generated from selling to three main end use industries. 47% of their revenue comes from the aerospace industry. 19% of the revenue comes from the 19% of the industrial gas turbines, and 15% from other various industries. 57% of the revenue comes from North America, 24% comes from Europe, and 7% from China.
The product family contains high-temperature alloys and corrosion-resistant alloys. These alloys are applied to flat products, tubular products, wire products, and bar/billet products. The vast majority of the revenue comes from high-temperature alloys at 79%. The corrosion-resistant alloys make up the other 21% of revenue. The flat products which include sheets, coils, plate, cut parts account for 62% of the revenue. The tubular products account for 13% of the revenue. The wire products account for 7% of revenue and the bar/billet products account for 18% of revenue.
The company’s moat is its research and development skill and its manufacturing infrastructure. Manufacturing requires large capital investments and increases the barrier to entry for the industry. Currently Haynes International has 22 published U.S. patents and applications in regards to proprietary alloys. This provides a layer of safety from competition because of the patent laws.
The worries with this company is they are cyclical in earnings based on the costs of raw material. They are heavily influenced by the prices of nickel and cobalt. This cycle nature and the fact they are price takers on these raw materials could affect their operating margins.
Valuation Metrics
Finviz is a great tool to see the valuation metrics in one place.
An important thing to notice is the market cap is around $500 million. This qualifies this company as a small cap stock. This means that there is less analyst coverage for this company and there will be more share price volatility because it takes less money to move the share price.
The important ratios to look at with this company is the price to earnings, PEG ratio, and price to sales. The PE ratio is currently around 13 and the earnings are predicted to increase. This ties into the PEG ratio because it means earnings multiple is less than the projected growth rate. The price to sales ratio is very interesting because it is 1. This means that the revenue of the company is equal to the market cap. You pay $1 for every $1 they earn in revenue. This means that the performance of the investment is going to track heavily on the operating margins they can produce.
FAST Graphs Analysis
The FAST Graphs software is a powerful tool used to analyze the earnings of a company compared to the share price. The black line is share price and the orange line is earnings multiplied by 15.
This chart is interesting to look at in terms of long term performance. The earnings have been obviously cyclical over time with share price tracking its earnings closely. The analysts project that the earnings will continue to go up for the next few years.
Bull Thesis
Haynes international provides good growth at a fair value. Haynes is projected to grow its earnings by at least 15% year over year while the current valuation is taking into account that growth. The company has a solid foundation with its manufacturing and R&D acumen. The multiple patents that Haynes owns provides it a shield from its competition in its high performing alloys. The material science field is going to be at the forefront for many high tech projects such as space travel, nuclear power, and green energy. Haynes’ alloys are going to be an important part in the development of those industries. These growth opportunities in general macroeconomic trends paired with the positioning of Haynes along with the current valuation of the company make for a good investing opportunity.
The investor relations presentations add evidence that the analysts predict an increase in earnings. Per the company they have a record backlog at $468 million and the backlog has increased for 27 consecutive months which signals strong demand. At the current valuation with the projected growth rate this could return at least 20% year over year which is greater than our investment goal.
Bear Thesis
Haynes international has been around for a long time and still hasn’t returned shareholder value at the rate that is the goal for our portfolio. This is a cyclical stock that is heavily dependent on the price of raw materials. The valuation doesn’t deserve to be any higher because as quickly as the earnings rose the earnings can decline if raw materials price increase. The risk associated with a stock that hasn’t ever returned the shareholder amazing growth isn’t worth investing in.
Rating
Basil Leaf Capital rates Haynes International a BUY rating. This company wouldn’t be for the faint of heart of investors because of the volatility involved. The growth rate is plausible based on the backlog of orders signaling demand. The impressive level of innovation and R&D work is a good sign for the performance of the company along with the importance of high performance materials that will influence the future technological developments. The current valuation is attractive particularly the price to sales and the PEG ratio. This would be a fair to undervalued price for this company. There are some more risks associated with this investment but thats the nature of investing in small cap companies.