4 Things Hardinge Has Going For It

Earlier this week I sold MSM and PTEN and replaced them with Hardinge (HDNG) and Team, Inc. (TISI). I'll go into some detail here about HDNG and my rationale. I had written that I felt like I was getting the steal of a lifetime with HDNG and, the Investing Gods read that and promptly smashed it into the ground. Such is life.

Hardinge, founded in 1890, makes a variety of material cutting tools (lathes, chucks, grinders, millers) for industrial use. It's customer base is diverse (aerospace, consumer goods, construction, defense, energy, pharmaceutical). Sales are roughly 75% from Europe and North America, the balance in Asia and elsewhere.

Price to earnings, sales and book are 8.5, .56 and .85 respectively. PEG Ratio is .27, EBIT/EV is about 5, debt-to-equity is about 11% and y-o-y quarterly earnings growth is about 35%. These multiples are all meaningfully lower than HDNG's competitors (ATU, KMT). HDNG's has slower revenue growth and smaller gross and operating margins than those competitors also.

But HDNG got bludgeoned on its earnings announcement (+35% is a "miss" on Wall Street since it was expecting +40%, sending shares down 35% in a day). Institutional and hedge fund ownership is high so if a big player wants out it could get ugly quickly. It's not a preferred hedge fund short, so the stock is not hopelessly manipulated (a legitimate concern in small cap investing, BTW).

In short, HDNG has:

• A diversified customer base (sector and geography)
• Growing earnings
• Cheap multiples
• A boring business

Welcome to the party, HDNG.

Comments

[Jeff Geygan:]

I listened to HDNG's conference call last weak and was somewhat surprised that the company is just now realizing that their distribution system is need of major overhauling. Further, Mr Ervin suggested that the cost of such an overhaul would be minimal. Why after so many years is management just now relaizing they have this problem? Can they fix it and if so at what real cost and what opportunity cost? I would like to be more enthused by the stock, since it does appear to be cheap, but need to understand managements motives and abilities.

2008 Mar 07 08:48 AM