What You Need to Consider With Haynes International
Ajay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Haynes International (NASDAQ: HAYN) is an industrial goods manufacturer that has been operating internationally for more than 100 years. It maintains a position as one of the world’s largest producers of high-performance alloys by specializing in technologically sophisticated products, such as those which are corrosion or heat resistant. This allows them access to specialized manufacturing customers in the aerospace, power generation, and chemical treatment industries. Using the recently revealed Q2 results, this article is going to dig into the performance of Haynes, benchmarked against some larger competitors, to find out more about the stock’s gradual decline over the year.
When discussing the financial results of Haynes, the discussion immediately turns to the company’s earnings, which have recently missed analyst targets of $0.57 by $0.05, meaning that the company’s income for the year fell just $600,000 short of their expected $7million objective, an 8.7% miss. The result of this miss has then been an institutional sell-off of the stock, as large funds reduce their exposure to the stock’s volatility.
In viewing this setback, it is important to notice that the reason for the missed estimate is a decline in the profitability of the company, despite an increase in the actual revenues of the company. That being said, competitors of Haynes have also shown missed earnings expectations, with Allegheny Technologies Incorporated (NYSE: ATI) having missed their out consensus target by a massive 47% due to similar top-line problems. From there, analyst price targets for the industry group have declined more for competitors ATI and ThyssenKrupp AG than they have for HAYN, to the point at which HAYN seems to be maintaining the strongest relationship against its proportionately expected stock price.
In order to get a better idea of how it is that an investor can use Haynes earnings release information to establish an actual investment thesis, an investor needs to dig into the comparative earnings of the company to determine if there is a comparative opportunity to buy. Specifically, an investor will want to determine whether or not the company is better prepared to take advantage of cyclical growth than its competitors, and therefore realizes proportionately greater volumes of earnings during a market upturn than its competitors.
With respect to the cyclical top-line performance of Haynes, the company has shown an ability to grow its revenues annually by 8% per year since 2009, which is an impressive feat when seeing how it is that competitor Allegheny has actually shrunk by 4% over the same period, and ThyssenKrupp’s 4% per year growth. This growth demonstrates the benefit of Haynes’ expertise, and ability to capture market share with its specialized product base, despite declining growth within the industry itself.
From there, the company has managed to maintain a profit margin of 5%, against Both ATI and TKA’s <1%, and has shown margins nearing 10% in the past, while competitors tend to remain below 4%. Given that the company’s margins have then also declined less than those of its competitors, an investor can see how it is that Haynes’ business is demonstrating a more robust profitability than its competitors, which leads us to the outcome of our discussion.
In combining our understanding of how it is that Haynes’ revenues are growing at a rate that is faster than its competitors, and maintaining a level of profitability that is both stronger than competitors, and declining at a slower rate than that of its competitors, it seems as though Haynes actually presents a comparative purchasing opportunity based on its apparent ability to generate returns for investors during a cyclical upswing. That being said, investors have currently priced the stock as being worth $45.88, which an investor can use to solve for an expected discount rate of 8% through the Dividend Discount Model.
As such, investors looking to establish a position in Haynes should consider the macroeconomic environment, and evaluate the company’s ability to exceed this rate of growth. Such a situation would occur during a cyclical upswing, during which the price of the company’s final product should increase, and the size of its top-line should increase at a rate that demonstrates the company’s ability to scale at a greater pace than its competitors.
Ajay Goel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!