Joe Kunkle's  Instablog

 Hawkins Inc (HWKN) 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.

The company is a basic materials wholesaler, distributing bulk and specialty chemicals in the United States.  It operates in 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.

Valuation is extremely cheap trading at 7.3X forward earnings and 0.7X sales and the company excels in efficiency, having the highest ROA (17.42%), ROE (21.81%), and Operating Margins (11.73%) in its industry group. It also has an EV/ EBITDA, a common measure of valuation across industries, 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 who owns 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. 

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 1 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 and longer term, it looks like a great potential acquisition target.

Disclosure: Expecting to purcashe HWKN shares this week