Haynes International (NASDAQ:HAYN)
Haynes International Inc. is a $450 million equity market cap manufacturer of nickel and cobalt high temperature (HTA) and corrosion resistant (CRA) alloys. While we have known Haynesfrom a research perspective for over a decade, we finally got the opportunity to purchase a position in the company in the second quarter, as its shares sold off from over $45 per share in January to our entry point of roughly $35. While the stock price decline provided us an opportunity in line with our patient buying approach, we also feel the investment is quite timely given the expected acceleration of the company's aerospace related sales and a likely strong improvement in free cash flow, as it wraps up a major capital expenditure program to increase production levels nearly 50% at its core Kokomo Indiana mill.
Haynes meets all the tenants of our Third Avenue investment philosophy. Haynes has a rock-solid balance sheet with no debt and over $5 per share in net cash. Indeed, we foresee the balance sheet continuing to strengthen as capital expenditures fall from $22 million in 2017 down closer to maintenance levels of roughly $5 million, and free cash flow conversion should re-approach 100% of net income.
Haynes also providesnear and long term visibility to grow revenues and earnings. Haynes' alloys are in high demand across the economy from healthcare to industrial uses.
Growth in shipments to narrow-body airframe engine platforms for both Boeing and Airbus look particularly compelling due to both the long term backlog of units to build and from the significant amount of new dollar content Haynes has on these engines.
At our purchase cost of roughly $35 per share, we see compelling upside of over 35% to our NAV--a nice potential return given the downside protections provided by itscash flow and balance sheet position, as well as from a potential resource conversion event due to the likely interest in the company from larger strategic peers.
From Third Avenue Small-Cap Fund's second quarter 2017 shareholder letter.
