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Haynes International (NASDAQ:HAYN) develops, markets, and manufactures specialty alloys for aerospace, chemical processing, gas turbines, power generation, incineration, industrial heating, hazardous waste, etc. These alloys are manufactured in several forms: sheet, coil, plate, forgings, fasteners, bar, wire, billet, tube, as well as value-added custom cuts and forms.

The Company's customers are very diverse, including GE (NYSE:GE), Rolls Royce (OTCPK:RYCEY), Boeing (NYSE:BA), DuPont (NYSE:DFT), Dow (NYSE:DOW), Eli Lilly (NYSE:LLY), BP (NYSE:BP), and many more. The manufacturing occurs in the US (Indiana, Louisiana, North Carolina) with 6 US Sale/Service centers and 7 international (England, Frarnce, Italy, Switzerland, India, China).

As of the last conference call, the company was operating at +100% operating capacity for flat alloy products (accounting for 70% of profits). The Company claims to have "big demand for value-added service" and is "moving up the value chain" in their niche markets. Moving into this model can grown the companies moat and competitive advantage. By continuing R&D, becoming critical partners with their customers, and increasing value-added products the Company can protect their weak moat.

The valuation for this company is attractive on traditional metrics.

  • Market Cap: $520
  • P/E: 7.5
  • ROE: 28.26
  • D/E: 0.12
  • Net Margins: 11.81%
  • Yield: 0%
  • EPS: $5.88
  • BV/Share: 26$

The stock is down nearly 50% in the past three months (in the bottom 10% of the market). This scary drop opens up an opportunity for long-term investors.

Here are several return scenarios using a discounted EPS valuation. The models conservatively estimate EPS at $5 with a 10% discount rate:

  • Scenario 1: 2% growth in perpetuity = $63
  • Scenario 2: 6% growth for 4 yrs. followed by 2% in perpetuity = $73
  • Scenario 3: 10% growth for 5 yrs. followed by 2% in perpetuity = $88

*This model assumes no further dilution.

Notes:

As a small company, HAYN is always subject to take over speculation. They pose a nice value to the massive multinational steel companies.

The price of nickel (needed for nickel-alloys) is driven by the stainless steel markets. Third Avenue Value is a holder of the company.

The Company is a provider to Boeing but hes very low exposure to the 787 Dreamliner.

The company has a decently sized short interest.

Disclosure: none

Source: The Long Case for Haynes International