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Twin Disc: Won’t Reach Intrinsic Value Anytime Soon
Posted by: Jae Jun (IP Logged)
Date: March 29, 2012 04:29PM
Twin Disc makes transmissions, shift controllers, propellers, water jets and other industrial power transmission products for marine and industrial vehicles. You can get an idea of what products they sell from the links below.
The stock dropped 18% on earnings announcement in January and is now down 27% YTD.
But, does it offer any value?
Twin Disc Spider Graph
Findings on Management
Company GrowthTWIN sells to the oil industry and at the moment with oil prices increasing, their 6 month backlog as of June 2011 was $146.9m vs $84.4m.
This is quite a big jump in the 6 month backlog. Shows that there is potential and demand for their products provided the economy helps.
However, TWIN is better than most small industrial companies because they design specially engineered products to meet and serve market demand. If they continue to research and develop products, they can grow but it is difficult to differentiate from competitors.
Add in the fact that the majority of company growth has to come from an improving economy. These types of companies are under heavy economic influences. Unless there is a total product in a truck or boat, customers are not inclined to purchase their products. Or if money is tight, it is easy to get a part serviced or fixed versus replaced.
Strategic Advantage/MoatI cannot think of or find any strategic advantages.
Even the goodwill section in the annual report does not show anything significant in terms of hidden assets or relationships which could be interpreted as a moat.
CompetitorsThere are lots of competitors both domestically and internationally selling power transmission products. Up to this point, I don’t find TWIN attractive enough to go through their competitors.
Financial Numbers and Quick Valuation
Even if I use 9% discount rate, the expected growth rate is 14%. Much too high for a cyclical company.
Performing a reverse Graham with EPS of $1.60, the implied growth rate is 9%. Achievable but difficult in my opinion given the risk and the environment in which it does business.
The reproduction value of the business comes out to around mid to high $20’s so there is potential in terms of maximizing value out of its assets.
But overall, valuation wise, it looks fairly to slightly overvalued purely based on these numbers.
Other Pieces of Info
ConclusionThere are hints here and there that management isn’t the most shareholder friendly, but my opinion is arguable because they pay a very small dividend and bought back shares during the lows of 2008 for an average price of $7.25.
If the company announces a share buyback, it will be a clear indicator that management believes their stock price to be cheap. I would prefer to see other insiders other than the CEO to purchase shares.
Fundamentally, the company is average, but management has done a good job of maximizing the potential during the good years.
With that said, the upside does not outweigh the downside. Far too many things could go wrong before upside could materialize.
Think of it as probabilities. Even with the big drop YTD, the upside is maybe 30-40% max whereas the downside percentage is easily 40% and could be greater if the economy continues to slide.
Stocks Discussed: TWIN,