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Twin Disc: Not Sufficient Information to Make a Decision
Posted by: Mark Lin (IP Logged)
Date: November 26, 2012 09:16AM

Twin Disc Inc. (TWIN) designs, manufactures and sells marine and heavy-duty, off-highway power transmission equipment. Products offered include marine transmissions, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and control systems. TWIN sells its products to customers primarily in the pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. Its worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.

Valuation

TWIN is currently trading at 1.31x P/B, a 27% discount to its five-year average P/B of 1.81. In terms of earning-based valuations, TWIN trades at a trailing 12 months P/E of 10.38 and a trailing 12 months EV/EBITDA of 4.58. TWIN achieved a five-year average ROE of 13.82% and a 10-year book value per share CAGR of 8.75%.

Financial and Business Risks

TWIN has a moderate gross debt-to-equity ratio of 28% and a net gearing of 12%. This is partly mitigated by a strong interest coverage ratio of 27 and current ratio of 3.

Customer concentration is not an issue for TWIN. TWIN’s top-10 customers accounted for approximately 49% of TWIN's consolidated net sales in fiscal year 2012, with no single customer accounting for 10% or more of consolidated net sales.

The majority of TWIN’s manufacturing came from its two facilities in Racine, Wis. If operations at these facilities were to be disrupted, any resulting interruption in production capability could require TWIN to make substantial capital expenditures to remedy the situation, which could negatively affect its profitability and financial condition.

TWIN may experiences shortages of raw castings and forgings used in the manufacturing of its products or increased raw material costs, if there is an unexpected surge in demand for steel. TWIN claims that it has offset the effects of increased commodity costs through cost reduction programs and pricing actions.

TWIN sells its products to customers primarily in the pleasure craft, commercial and military marine markets, the energy and natural resources, government and industrial markets. Some of TWIN’s products are directly or indirectly used in oil exploration and oil drilling, and are thus dependent upon the strength of those markets and oil prices. For example, a significant decrease in oil prices in 2011 had an adverse effect on the sales of these products and ultimately on TWIN’s profitability.

Business Quality and Capital Allocation

TWIN claims that 94 years of proven application know-how, niche market focus, global distribution service network, product/market geographical diversity and core manufacturing capabilities are the differentiating factors for TWIN. TWIN's gross and operating margins for fiscal years 2011 and 2012 are back to their 2006-to-2007 highs at 34% and 12%, respectively. The lack of publicly available information on TWIN's "stated competitive advantages" does not allow me to investigate further.

TWIN has paid a dividend every single year since 1995 and has a dividend yield of 2.25% with a corresponding dividend payout ratio of 22%. Dividends are paid quarterly.

Conclusion

I am unable to have a satisfactory understanding of TWIN's business due to the complex conglomerate structure and the lack of company information on their stated differentiating factors. I will have to give this stock a miss.


Disclosure


The author does not have a position in any of the stocks mentioned.


Stocks Discussed: TWIN,
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