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Haynes International: Analysis Of An Alloy Producer

|Includes: Haynes International, Inc. (HAYN)

Here's a quick description of the company:

"Haynes International, Inc. produces nickel- and cobalt-based alloys in flat product forms, such as sheet, coil and plate forms. The Company operates through the segment of design, manufacture, marketing and distribution of technologically advanced, high-performance alloys for use in the aerospace, land-based gas turbine, chemical processing and other industries. Its products consist of high temperature resistant alloy (NYSE:HTA) products and corrosion resistant alloy (NASDAQ:CRA) products. HTA products are used by manufacturers of equipment that is subjected to high temperatures, such as jet engines for aerospace market, gas turbine engines used for power generation and waste incineration, and industrial heating equipment. CRA products are used in applications that require resistance to corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment. It also produces its products as welded tubulars, and in slab, bar, billet and wire forms."

This is a run of the mill commodity producer. Profitability is hugely variable dependent on tons shipped and price received per ton. It is a decent company. But it isn't a valuable one. Here's how you figure that out - look at their 10K, in particular, this section:

"Raw materials represented 39% of cost of sales in fiscal 2016. Nickel, a major component of many of the Company's products, accounted for approximately 49% of raw material costs, or approximately 19% of total cost of sales in fiscal 2016. These proportions are lower in fiscal 2016 compared to fiscal 2015 due to the decline in the market price of nickel that occurred towards the end of fiscal 2015. As nickel prices remained relatively lower throughout fiscal 2016, nickel as a percentage of raw materials and total cost were lower in fiscal 2016 compared to fiscal 2015. Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw material, purchased scrap and internally produced scrap.
The average nickel price per pound for cash buyers for the 30‑day period ended on September 30, 2014, 2015 and 2016, as reported by the London Metals Exchange, was $8.20, $4.49 and $4.63 respectively. Prices for certain other raw materials which are significant in the manufacture of the Company's products, such as molybdenum, cobalt and chrome, were lower in fiscal 2016 compared to fiscal 2015."

Even before you begin to analyze the numbers, understand that what determines profitability is a bunch of metal prices. Nickep, molybdenum, tungsten - all unpredictable and highly volatile. The company will never trade at a decent multiple of earnings.

Let's look at this quarter's performance, just to get a sense of how business is doing:

Here are the key points, whicht he company highlights:

 

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Net revenues of $406.4 million and net income of $5.0 million, or $0.40 per diluted share, for fiscal 2016, compared to net revenues of $487.6 million and net income of $30.5 million, or $2.45 per diluted share, for fiscal 2015.

 

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Backlog of $168.4 million at September 30, 2016, a decrease of 10.1% from $187.2 million at June 30, 2016.

 

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Capital spending for fiscal 2016 of $31.6 million.

 

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Regular quarterly cash dividend of $0.22 per outstanding share of the Company's common stock declared.

The backlog going down is not a good thing. How does that CAPEX of $32MM compare to their profitability?

Well the company is not highly indebted (a good thing given the cyclical nature of the end markets) and it has actually accumulated earnings on its balance sheet, so the CAPEX hasn't led to problems in the past. Operating income over the last four years has gone from +$50MM down to close to zero. CAPEX as % of revenues is around 7-10%, not crazy high, but not very low (<3%) either.

Here are further details of their capital spending plans:

"Capital spending in fiscal 2016 was $31.6 million, and the forecast for capital spending in fiscal 2017 is approximately $22.0 million. The $22.0 million of planned capital spending includes $6.0 million to continue to build out and increase the LaPorte service center operations and $4.9 million to further increase sheet manufacturing capacity in the Kokomo operations, which is expected to help the Company to keep pace with the anticipated growth in the aerospace market. The remaining $11.1 million of planned spending is earmarked for the completion of the manufacturing phase of the IT systems upgrade ($0.5 million) and continued upgrades throughout our manufacturing facilities ($10.6 million)."

What is also interesting is that the company has paid a dividend for a long time. Now net income has fallen below the dividend over the last year, it will be interesting to see how the company reacts to this.

Guidance

Here's what the company had to say:

"The Company expects the revenue and earnings in the first quarter of fiscal 2017 to be to be lower than those achieved in the fourth quarter of fiscal 2016, excluding the favorable tax benefit. The first quarter is always impacted by lower production and shipping days due to holidays and planned maintenance shutdowns. In addition, the Company is expecting lower levels of specialty application project shipments in the first quarter as compared to the fourth quarter. Management believes base-volumes and prices will continue to be challenged in the next quarter with tepid demand, the continued strong dollar and uncertainties in the global macro-economic and political environment."

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