Korean Hankook - Cheap Stock And Plans To Grow Revenues 15% In 2017

| About: Hankook Tire (HAOOF)

Summary

Hankook is transitioning from cheap tires to higher end.

The company is building a plant in Tennessee and is rapidly expanding.

The stock trades at a forward PE of 8.

Hankook (OTC:HAOOF), the Korean tire manufacturer, is very profitable and stealing market share from competitors. The stock is cheap and the company wants to grow 15% in 2017.

The stock trades at 57,300 won, there are 123.85 million shares, and the market cap is 7.1 trillion won ($6.1 billion). It takes 1151 won to buy one dollar. The stock pays a 400 won dividend and yields 0.7%. Earnings per share last year was 2,844 won and the price to earnings ratio was 20.

I got the idea from reading a Barron's article. Chan Lee of Petra Capital is a fan and shareholder. He notes that at a forward PE of 8, the stock is much cheaper than Michelin, Bridgestone, and Continental, which trade at forward PEs of 11. Though the tires are known to be second tier, Hankook now counts BMW, Audi, and Ford as customers. Korean Hyundai and Kia are customers. The company has lower labor costs and great productivity at its plants than its competitors. Analysts interviewed at Factset expect earnings to grow at 10% over the next three to five years.

In 2016, sales were 6.62 trillion won ($5.75 billion) and were up 3.1%. Operating profit was 1.1 trillion won ($955 million) and was up 24.7%. In 2015, sales were 6.428 trillion won ($5.58 billion) and Ebitda was 1.344 trillion won ($1.16 billion). This was down considerably from 2013'w 7 trillion won ($6 billion) in sales and 1.444 trillion won ($1.25 billion) in Ebitda. Return on equity was 12.8%. Tires can be quite profitable. Net profit margin was 12.9%.

According to the 2015 Annual Report, 30.4% of sales came from Europe, 22.6% the Americas, 10.4% Middle East/Africa/other Asia (I've never seen all of these countries lumped together like this), 17.4% Korea, and 19.2% China.

In the latest quarter, there was 917 billion won ($800 million) in cash and 1.26 trillion won ($1 billion) in receivables. This is to 2.9 trillion ($2.5 billion) in debt. Hankook is very solvent. In the first half of 2016, sales were up 6.6% year over year and Ebitda was up 37%.

In the third quarter, sales were down 3.9% year over year. Revenues were down in Korea due to a strike and weak demand. In China, revenues were up slightly from last year. What I find most interesting is that sales were up 5 billion won ($43 million) in North America from Q3 last year. It seems their tires are really catching on in the U.S. The price of rubber reached a low point in recent years at the end of 2015 but have since rebounded.

Looking on the internet, I see a Hankook tire for sale at Wal-Mart (NYSE:WMT) for $218. It's an all season truck tire. So they are carried at Wal-Mart. That's important. I also see their tires available at Pep-Boys and Tirerack.com. No doubt, they are discount tires. But since tires have to meet Highway Safety Standards, a lot of folks don't spend big on tires because of the stringent standards. I looked up a 55R16 tire that fits a Honda Civic. I see an $85 tire at Wal-Mart. Uniroyals and Antares seem to be consistently cheaper. The company is expanding a plant in Clarksville, Tennessee. The plant is expected to manufacture 1.7 million tires in 2017 and 5.3 to 5.4 million in 2018 when construction is complete.

Hankook's Dynapro AT-M is a top pick from Consumer Reports. Consumer Reports is arguably the most trusted source for comparing goods and services for the American consumer. When comparing, often times, the most expensive items are not ranked the highest. This portends good things for Hankook.

I like the stock. It's cheap and sales are growing. The company is very profitable. Like many Asian companies, Hankook starts off with a "cheap" reputation and then focuses on R&D and makes inroads into the high end segment. Toyota didn't start off with Lexus. It came to the U.S. with tiny cars and trucks. Hankook could be a great stock for a diversified portfolio looking for exposure to Korea and Asia.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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