Hawkins Is a Diamond in the Rough

Hawkins Inc (HWKN) is a basic materials wholesaler, distributing bulk and specialty chemicals in the United States. It operates in the water treatment, industrial, and pharmaceutical segments. Many of its products are used to improve the environment, which is a key area of focus in the new presidential administration, so it is fair to say that demand for Hawkins’ products will continue to be strong.

Hawkins has a market cap of just $194 million while recording sales of $274 million last year. Although small caps generally are placed into the “risky” asset class, Hawkins has a beta of 0.45, less than half as volatile as the broader markets, and the company yields a 2.75% dividend while maintaining a clean balance sheet with zero debt.

Buffett likes it

Valuation is extremely cheap trading at 7.3X forward earnings and 0.7X sales. The company excels in efficiency, having the highest ROA [return on assets] (17.42%), ROE [return on equity] (21.81%), and operating margins (11.73%) in its industry group. It also has an EV/ EBITDA of just 4.76, which is well below market averages.

Nalco (NLC), which specializes in water treatment chemicals and has the backing of Warren Buffett's Berkshire Hathaway (BRK.A) through ownership of 9 million shares, trades at an EV/EBITDA of 7.835, 13.4X forward earnings, and only yields a 0.8% dividend with loads of debt littering the balance sheet.

Outlook

The company is trading at an extremely attractive valuation, growing rapidly, and made a major technical breakout that I expect to send shares 20% higher in the short term.

Shares are relatively thinly traded at less than 20,000 shares a day on average, but recent action shows that large institutions may be taking notice, as volume has been closer to 50,000 shares a day for the last 10 trading sessions. Shares recently broke out of consolidation and October 2008 highs, clearing way for a move to all time highs, and an implied move on the ascending triangle breakout to $23.

Earnings grew 12.5% this year and are expected to grow 9.7% next year, while the EPS gained 362% quarter over quarter in its most recent results.

Only one analyst on the Street covers this stock, making it the perfect “diamond in the rough” to invest in before more firms begin to take notice.

If you are looking for a relatively unknown growth company trading at a valuation well below industry averages, while being the “best of breed” and having a lot of potential upside, Hawkins is worth an investment.

Hawkins has short term upside of 20% or more. Longer term, it looks like a great potential acquisition target.

Disclosure: Expecting to purcashe HWKN shares this week

Comments

[robert99:]

Definitely my kind of stock, but I want it 25% cheaper. Thanks for the heads up, though - it's going on my watch list.

May 21 09:42 PM

[Nathaniel C:]

Thanks for the idea. Looks like an interesting small cap.

May 21 10:00 PM

[Bruce Pile:]

In addition to their water treatment chemicals, which is a good growth area of the future, Hawkins is something of a stealth agri chemical play, but without the high profile foibles of a Potash or Agrium. These fund darlings have too much of a tendency to follow and amplify all the sharp moves of the market, not because of their fundamentals, but because of their shear popularity. I don't like the popular, high profile names just for that reason. HWKN tends to move more independently from the market.

Hawkins certainly has the growth of a fund darling. Their revenue growth the last 3 years has been jaw dropping. If you look at a bar chart of their eps of the last 10 years, it has the look of an explosive growth stock with the recession of '07/'08 merely holding flat a hyperbolic curve that is now resuming. You are paying a P/S of 0.75 (I like any P/S that starts with "0") and a ttm P/E of just 10 for this level of growth, not what you'd expect to pay. The price/cash flow is 18, more expensive than I like, and there is no insider buying to speak of. But they all have a wart or two.

With a tiny float of 8 million shares, any big fund movement into this stock could turn it into a rocket. If it should become a popular agri chemical play as well as a popular water play, it may attract such money. The agri involvement is just a small part of everything they do, but CEO John Hawkins said in commenting on a stunning fiscal Q1 '09 on 8/7/08 "...we realized higher margins on certain products this past quarter given growing demand and a tight supply environment, which drove up prices primarily in products serving the agricultural sector."

May 21 11:24 PM

[heller:]

a healthy 80 years old who doesn't have the patience to hold stocks so i am dabbling in options and enjoying the action. only wish my brokerage firm would my schedule d,form 1040.

May 22 12:17 AM

[Joe Kunkle:]

Well if you want to trade options, you should check out my site OptionsHawk.com ; making people a lot of money over there


On May 22 12:17 AM heller wrote:

> a healthy 80 years old who doesn't have the patience to hold stocks
> so i am dabbling in options and enjoying the action. only wish my
> brokerage firm would my schedule d,form 1040.

May 22 11:55 AM

[Vertrinsic:]

HWKN has very high quality institutional ownership already, T Rowe Price, GAMCO, Royce, etc. The smart money knows what the future holds for this company


On May 21 11:24 PM BrucePile wrote:

> In addition to their water treatment chemicals, which is a good growth
> area of the future, Hawkins is something of a stealth agri chemical
> play, but without the high profile foibles of a Potash or Agrium.
> These fund darlings have too much of a tendency to follow and amplify
> all the sharp moves of the market, not because of their fundamentals,
> but because of their shear popularity. I don't like the popular,
> high profile names just for that reason. HWKN tends to move more
> independently from the market.
>
> Hawkins certainly has the growth of a fund darling. Their revenue
> growth the last 3 years has been jaw dropping. If you look at a bar
> chart of their eps of the last 10 years, it has the look of an explosive
> growth stock with the recession of '07/'08 merely holding flat a
> hyperbolic curve that is now resuming. You are paying a P/S of 0.75
> (I like any P/S that starts with "0") and a ttm P/E of just 10 for
> this level of growth, not what you'd expect to pay. The price/cash
> flow is 18, more expensive than I like, and there is no insider buying
> to speak of. But they all have a wart or two.
>
> With a tiny float of 8 million shares, any big fund movement into
> this stock could turn it into a rocket. If it should become a popular
> agri chemical play as well as a popular water play, it may attract
> such money. The agri involvement is just a small part of everything
> they do, but CEO John Hawkins said in commenting on a stunning fiscal
> Q1 '09 on 8/7/08 "...we realized higher margins on certain products
> this past quarter given growing demand and a tight supply environment,
> which drove up prices primarily in products serving the agricultural
> sector."

May 22 11:55 AM