I discussed Twin Disc. Inc (TWIN) with Clay Mahaffey, CFA Chief Analyst of the National Eagles and Angels Association on the "Stock Watch" segment of my nationally syndicated show on March, 15th 2012.
Below is the discussion we had on the show, which provides great insight into Twin Disk that the individual investor can use in building a portfolio.
George Jarkesy: So tell us what kind of company did you pick for the stock watch today?
Clay Mahaffey, CFA: George, today I'd like to talk about Twin Disc. It trades on the NASDAQ symbol TWIN. It's about $29.00 today. And I like this company because it's relatively cheap compared to the growth that I think they will experience. And, George, this is an industrial manufacturing company. They manufacture and distribute a range of power transmission equipment. The company was started in 1914 with a "twin disk clutch" that the founder made for, which was an improvement for farm tractors. The family is still running the company. The Chairman and President, are the third and fourth generation from the founder, they own 22% of the company approximately, and over the last 80, 90 years they've expanded from tractors into transmission devices for marine and heavy duty off road markets.
These products are used in marine pleasure craft, work boats, mining equipment, aircraft rescuer and firefighting trucks and especially the oil and gas industry. Their sales have grown to about over $300 million in 71 countries. And the major product they have, George, is the transmission that's used in hydraulic fracking. And this is the process where the oil and gas operator pumps sand, and water, and other additives down into the shale under tremendous pressure and it cracks into the rock and when they release the pressure the sand holds the crevices open so the oil and gas can fly out at a much higher rate. So they make one of these components. They make the transmission that connects the diesel engine to the pump, so it's a very important piece of the operation, kind of under the radar a little bit.
So anyway, that's a big growth business for them. They reported their sales a couple of weeks ago. The sales were up 10%, the earnings per share were up 45%, they increased the dividend by a penny. So it's a very solid, profitable company. Their revenue is dependent on economic growth in general but they do have significant exposure to the oil and gas industry, specifically horizontal drilling which is still a very significant percentage of US operations. And it's cheap. I think the earnings are going to grow 10 to 20% over the next year. The stock is selling at only ten times next year's earnings, which I think is undervalued. It should be 12 to 15 times. And therefore, I think the up side here is about 40 to 50% over the next 12 months with a downside of probably 10% from the current price which is just under $30.00. And it did hit $45.00 back in August or September.
George Jarkesy: Sure. A lot of investors might be thinking of fracking, and fracking is here to stay. You've got to understand that the left, the far liberal left has to force prices higher on fossil fuels, coal, natural gas, oil, all have to be forced higher to get to their agenda. And their agenda is to do Solyndra. Their agenda is to do the Volt cars, which now they're not - they're wrapping up the building of those cars. I mean those are the things, they have to have higher prices for that to work. But I don't think fracking is going anywhere, I think fracking's here to stay, and in all disclosure, I actually own Twin Disc in my portfolio. I've had it for probably a couple months, so I, too, think a lot of the company.
I think there's a lot of upside there, but a lot of listeners may be thinking, is fracking the new dirty deal? All environmentalists are going to be after fracking. Yes, it's another component. Why did they go after it? Because it started being very affective at getting natural gas and you've seen natural gas prices drop substantially.
Clay Mahaffey, CFA: They've collapsed, George, they're at a 10 year low, $2.20, $2.30 an MCF of gas, very cheap.
Disclosure: George Jarkesy is long on Twin. Clay Mahaffey does not hold TWIN.
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