Haynes International Inc. (HAYN, Financial) develops, manufactures and markets high-performance nickel and cobalt based alloys in sheet, coil and plate forms. Its products are resistant to corrosion and high temperatures and are used in jet engines, other gas powered turbines, industrial heating equipment, chemical processing, power plant emissions control and hazardous waste treatment.
The company's stock has been lagging. Any increase of orders for commercial aircraft and long-term turbine growth needs to be considered in regard to decreasing costs for nickel. Leaner defense budgets, an overall decline in gross profit margins and backlog issues also merit scrutiny in order to determine if a resurgence could be at hand.
Thompson/First Call consensus estimates are for $3.46 per share in 2014 earnings and for a five-year growth rate of 18%. Currently trading at $48.66, the stock is cheap by their measures. Further, the median price target is $61.50. JPMorgan rates it Overweight. The company is scheduled to announce its earnings for third quarter 2013 after the close on Thursday, Aug. 8, 2013, with the market expecting $0.44 per share. A conference call is scheduled for Friday at 9:00 a.m.
The corporation has missed expectations since third quarter 2012, disappointing four straight times. HAYN has also been underperforming in comparison to exchange-traded funds such as iShares Global Industrials ETF (EXI), US Industrials ETF (IYJ) and the Russell 2000 Index (IWM). The ETFs, particularly IWM, can be safer because of diversification.
The stock currently pays a dividend of $0.88 per annum to yield 1.81%. Records show it going ex-dividend on Aug. 30, 2012, and paying $0.22 quarterly since fourth quarter 2011. An increase can not be ruled out, but is not foreseeable due to inconsistent cash flows, and is a reason that I am in no hurry to acquire shares.
Figures vary depending on the source; however, HAYN does not appear to be in institutional favor. Thomson Financial shows a 20.86% outflow, and Vickers Stock Research Corporation a 1.99% increase in holdings, since the previous quarter. There has been no notable activity among insiders.
Regarding management, President and Chief Executive Officer Mark Comerford has been at his post since October 2008. There is a new CFO, Daniel Mauldin, elected on Dec. 1, 2012, after his predecessor's March 27 retirement. Amid the changes, the company has remained in a fairly strong financial position. Its market capitalization is currently $595 million and its enterprise value $543 million. Some summary figures from balance sheets follow.
There is no obvious fiscal concern. Perhaps the most troubling issue involves pension and post-retirement benefits: Haynes expects that it will be required to make future contributions to its defined plans. Declining plan investments in the future, changes, or an increase in costs could be a problem.
A more immediate focus is that customers, particularly aerospace and land turbine, have delayed purchases as metals cheapen. Higher inventories might result. Consequently, selling prices for backlogged products can decrease. Fortunately, results displayed above show a year-over-year and quarter-over-quarter inventory decline. The dollar value of the backlog, or confirmed customer commitments, has been dropping since March 2012, however.
Here is a listing of important risk factors:
· Profitability in high-performance alloy is sensitive to sales volumes; however, no customer accounts for more than 10% of sales as of September 2012.
· Cyclical markets comprise the majority of net revenues. Aerospace sales are dependent on the large aircraft manufacturing of Boeing (BA) and Airbus (EADSF.PK). A table showing percentages attributed to three main segments follows.
· Reductions in government expenditures, and sequestration specifically (emphasis added).
· Increased production of alloys and stainless steel from competitors. There is a resultant need to maintain cost structure as price concessions are made to customers.
· Nickel is a major component of raw material costs and total cost of sales ($10.26 per lb. for the year ended September 2010, decreased to $7.81 in 2012, and currently at $13885 per ton, or $6.39 per pound). Customers have actually been delaying orders as its price decreases. A graphic from a July 19 JPMorgan report showing inventories that have doubled since 2011, and the non-ferrous metal at $6.32 per lb. follows:
To reiterate, the company has missed earnings through the past year. The backlog has also consistently shrunk over the same time. Recent data affirms suspicions that net revenue, gross margin and gross profit would have also trended down since first quarter 2012:
One possibility is that the overall situation, and stock price, is bottoming. Management continues to believe in the long-term growth of aerospace, chemical processing and land-based gas turbines. Further, the company has been investing to expand manufacturing facilities.
As of third quarter 2012, plans have been announced to spend $37 million to expand titanium and high-performance nickel alloy tubular production in Arcadia, La., and $24 million to expand specialty high-performance alloy flat products by 20% at its Kokomo, In., facility. As of second quarter 2013, it forecasts $70 million in 2013 and $39 million in 2014, after $25.9 million on capital spending in 2012. The company also has service and sales centers in Europe and Asia. However, low natural gas prices in the U.S. bode well for the long term.
In the near term, unanswered questions are predominant. The second quarter conference call records Comerford saying:
· "We'd expect demand for our aerospace products to firm up over the next few quarters," which is a positive.
· "We remain very cautious as we look forward in land-based gas turbine," so expectations should not be high.
· "...The overall larger [chemical process] market remains very slow," a reason to hold off.
· "...We have excellent growth opportunities: geography, new alloys, new products...However...we still have not seen any rebound in our order books," which is another reason to wait.
· "...People are playing a little bit of a nickel game right now, and that is where we've expressed a lot of concern," a final warning in the May Call.
Haynes International has been struggling and patience is needed for long-term drivers to take effect. Clear indications are lacking that its backlog is improving, gross margin difficulty is behind it or that its customers have resumed orders. Until improvement is evident, risk outweighs foreseeable reward. Though raw materials and sales costs should be low, the company has not demonstrated that it has found pricing power.
Thus, nickel has fallen too drastically, in competitive markets, to bet on a positive surprise and immediate results. Depending on what is reported and discussed, and if it has sold off after Thursday, HAYN may prove enticing. Until then, patience and caution are indicated.
The company's stock has been lagging. Any increase of orders for commercial aircraft and long-term turbine growth needs to be considered in regard to decreasing costs for nickel. Leaner defense budgets, an overall decline in gross profit margins and backlog issues also merit scrutiny in order to determine if a resurgence could be at hand.
Thompson/First Call consensus estimates are for $3.46 per share in 2014 earnings and for a five-year growth rate of 18%. Currently trading at $48.66, the stock is cheap by their measures. Further, the median price target is $61.50. JPMorgan rates it Overweight. The company is scheduled to announce its earnings for third quarter 2013 after the close on Thursday, Aug. 8, 2013, with the market expecting $0.44 per share. A conference call is scheduled for Friday at 9:00 a.m.
The corporation has missed expectations since third quarter 2012, disappointing four straight times. HAYN has also been underperforming in comparison to exchange-traded funds such as iShares Global Industrials ETF (EXI), US Industrials ETF (IYJ) and the Russell 2000 Index (IWM). The ETFs, particularly IWM, can be safer because of diversification.
The stock currently pays a dividend of $0.88 per annum to yield 1.81%. Records show it going ex-dividend on Aug. 30, 2012, and paying $0.22 quarterly since fourth quarter 2011. An increase can not be ruled out, but is not foreseeable due to inconsistent cash flows, and is a reason that I am in no hurry to acquire shares.
Figures vary depending on the source; however, HAYN does not appear to be in institutional favor. Thomson Financial shows a 20.86% outflow, and Vickers Stock Research Corporation a 1.99% increase in holdings, since the previous quarter. There has been no notable activity among insiders.
Regarding management, President and Chief Executive Officer Mark Comerford has been at his post since October 2008. There is a new CFO, Daniel Mauldin, elected on Dec. 1, 2012, after his predecessor's March 27 retirement. Amid the changes, the company has remained in a fairly strong financial position. Its market capitalization is currently $595 million and its enterprise value $543 million. Some summary figures from balance sheets follow.
There is no obvious fiscal concern. Perhaps the most troubling issue involves pension and post-retirement benefits: Haynes expects that it will be required to make future contributions to its defined plans. Declining plan investments in the future, changes, or an increase in costs could be a problem.
A more immediate focus is that customers, particularly aerospace and land turbine, have delayed purchases as metals cheapen. Higher inventories might result. Consequently, selling prices for backlogged products can decrease. Fortunately, results displayed above show a year-over-year and quarter-over-quarter inventory decline. The dollar value of the backlog, or confirmed customer commitments, has been dropping since March 2012, however.
Here is a listing of important risk factors:
· Profitability in high-performance alloy is sensitive to sales volumes; however, no customer accounts for more than 10% of sales as of September 2012.
· Cyclical markets comprise the majority of net revenues. Aerospace sales are dependent on the large aircraft manufacturing of Boeing (BA) and Airbus (EADSF.PK). A table showing percentages attributed to three main segments follows.
· Reductions in government expenditures, and sequestration specifically (emphasis added).
· Increased production of alloys and stainless steel from competitors. There is a resultant need to maintain cost structure as price concessions are made to customers.
· Nickel is a major component of raw material costs and total cost of sales ($10.26 per lb. for the year ended September 2010, decreased to $7.81 in 2012, and currently at $13885 per ton, or $6.39 per pound). Customers have actually been delaying orders as its price decreases. A graphic from a July 19 JPMorgan report showing inventories that have doubled since 2011, and the non-ferrous metal at $6.32 per lb. follows:
To reiterate, the company has missed earnings through the past year. The backlog has also consistently shrunk over the same time. Recent data affirms suspicions that net revenue, gross margin and gross profit would have also trended down since first quarter 2012:
One possibility is that the overall situation, and stock price, is bottoming. Management continues to believe in the long-term growth of aerospace, chemical processing and land-based gas turbines. Further, the company has been investing to expand manufacturing facilities.
As of third quarter 2012, plans have been announced to spend $37 million to expand titanium and high-performance nickel alloy tubular production in Arcadia, La., and $24 million to expand specialty high-performance alloy flat products by 20% at its Kokomo, In., facility. As of second quarter 2013, it forecasts $70 million in 2013 and $39 million in 2014, after $25.9 million on capital spending in 2012. The company also has service and sales centers in Europe and Asia. However, low natural gas prices in the U.S. bode well for the long term.
In the near term, unanswered questions are predominant. The second quarter conference call records Comerford saying:
· "We'd expect demand for our aerospace products to firm up over the next few quarters," which is a positive.
· "We remain very cautious as we look forward in land-based gas turbine," so expectations should not be high.
· "...The overall larger [chemical process] market remains very slow," a reason to hold off.
· "...We have excellent growth opportunities: geography, new alloys, new products...However...we still have not seen any rebound in our order books," which is another reason to wait.
· "...People are playing a little bit of a nickel game right now, and that is where we've expressed a lot of concern," a final warning in the May Call.
Haynes International has been struggling and patience is needed for long-term drivers to take effect. Clear indications are lacking that its backlog is improving, gross margin difficulty is behind it or that its customers have resumed orders. Until improvement is evident, risk outweighs foreseeable reward. Though raw materials and sales costs should be low, the company has not demonstrated that it has found pricing power.
Thus, nickel has fallen too drastically, in competitive markets, to bet on a positive surprise and immediate results. Depending on what is reported and discussed, and if it has sold off after Thursday, HAYN may prove enticing. Until then, patience and caution are indicated.
