Sun Hydraulics: A Smooth Ride

Investors have had a long, smooth and successful ride with Florida-based Sun Hydraulics Corporation (Nasdaq: SNHY), a maker and marketer of key parts that harness fluid power.

Founded in 1970, the small cap designs and sells proprietary screw-in hydraulic cartridge valves and manifolds that are used in all sorts of industrial and mobile operations. The company’s product lineup is sold through a global network of distributors.

Sun Hydraulics went public in 1997 and has expanded beyond its home base of Sarasota to establish branches in the United Kingdom, Germany, Korea and China. In July, Sun said that it also was setting up a sales office in Bangalore, India.

As of last Dec. 31, slightly more than half of Sun Hydraulics’ sales were from outside the United States. The same held true in the quarter ended Sept. 29, as much of the company’s double-digit growth stemmed from the international marketplace.

While Sun Hydraulics appears to be a healthy small-cap stock, the company hasn’t attracted much in the way of analyst coverage. Admittedly, parts made for hydraulic systems aren’t the sexiest things out there that merit coverage, but the few analysts who do follow Sun Hydraulics have a somewhat positive outlook—not overwhelmingly so, but with leanings toward a positive sentiment, nonetheless.

Sun Hydraulics shares started the year in the low teens, hitting what’s been a 52-week low of $13.20 on Jan. 8—on an adjusted basis, to take into account a three-for-two stock split that took effect on July 17. The stock climbed to an adjusted high of $38.07 on July 18; on July 16 (ahead of the split), the stock hit an unadjusted intraday trading high of $56.20. Shares of Sun Hydraulics closed at $27.31 on Friday.

For the third quarter, Sun Hydraulics reported earnings of $5.2 million, a 33% increase from the 2006 period. On a per-share basis, earnings climbed by a third from the year before, to $0.32. Sales rose 15% to $41.8 million.

“Our international presence provides a necessary balance to our business,” said Allen Carlson, Sun Hydraulic's president and chief executive officer, in a Nov. 5 press release. “While the U.S. economy appears to be softening, our international sales continue to contribute significantly to our top and bottom lines, with international sales making up 59% of the total last quarter.”

On a Nov. 5 conference call with analysts, Carlson said the company has maintained a healthy balance between domestic and international sales.

“Sun's international demand has contributed significantly to our performance this year with 82% of our year-to-date sales growth generated in Europe and Asia,” Carlson said. “Year-to-date international sales make up 58% of the total sales of Sun. Our local presence in Europe and Asia has facilitated penetration of those markets and allowed us to capture market share.”

Following Sun Hydraulics’ release of its third-quarter financials, analyst Robert McCarthy of Robert W. Baird & Co. issued a report maintaining a “neutral” rating, writing in his note to investors: “Market share gains and margin expansion (augmented by the announcement of a 2008 price increase) appear likely to continue, but with the shares currently trading at 11.8 times our 2008 EV/EBITDA estimate, risk/reward appears balanced.”

The Baird analyst did adjust his earnings-per-share estimates for the fourth quarter and full year $0.01 higher, expecting $0.30 EPS for this quarter and $1.33 per share for the entire year. He kept his 2008 earnings estimate at $1.50 per share and kept his price target at $29.

Analyst William Lyons of Westminster Securities, who has been following Sun Hydraulics for two years, reinstated a “strong buy” rating on the stock in May, following a stronger-than-expected showing in the first three months of the year. Nothing appears to have changed his opinion about Sun Hydraulics since then, and Sun’s overseas strategy impressed him.

“This is a very well-run company,” Lyons told SmallCapInvestor.com. “I asked them on the conference call about their international strategy, and their answers gave me the confidence that the international performance was not a one-off occurrence.”

Sun Hydraulics integrates well into the local business climate of each country that they enter, and Lyons noted that “they really don’t come off as ugly Americans.”

A few days before Sun Hydraulics released its third-quarter results, the company announced that it would spend $2.4 million to take a 48% equity stake in privately held High Country Tek, with an option to buy out the California maker of ruggedized electronic and hydraulic controls for mobile applications after Dec. 31, 2009.

In addition to the stock split, Sun Hydraulics boosted its stock dividend over the summer to $0.09 per share—which many investors favor in a turbulent stock market. Sun also said that its board of directors had elected Ferdinand Megerlin as chairman, replacing Clyde Nixon, who died in April.

For the current quarter, Sun Hydraulics is estimating sales will total around $40 million, about 14% better than last year, while it’s expecting to report earnings per share in the range of $0.28 to $0.30—roughly 26% better than in 2006. Sun believes that for all of 2007, its sales will grow 17% from 2006, to about $166 million, while EPS should finish the year up 33%, hitting a range of $1.31 to $1.33.

With shares trading somewhat close to Baird analyst McCarthy’s price target of $29, investors looking to go with the flow of Sun Hydraulics (SNHY) might find it a bit pricey. But it could be a small cap worth jumping on, with expectations that it will continue to provide rewards—especially as the international demand for its products grows.

Disclosure: none