Twin Disc (TWIN)

boats

Key Statistics

Enterprise Value = $227.52 million

Operating Income = $32.64 million

EV/Operating Income = 6.97x

Price/Revenue = .59x

Earnings Yield = 10%

Debt/Equity = 34%

The Company

Twin Disc is a manufacturing firm established in 1918. They have a diversified manufacturing business. A bulk of the business is related to the manufacture of transmissions for boats and heavy duty equipment. In addition to marine transmissions, they make propulsion systems, steering, gearboxes for boats. Basically, they specialize in all mechanical aspects of marine propulsion.

They also make transmissions and propulsion systems for heavy duty off-highway land vehicles. This equipment is used heavily in the oil & gas industry, as well.

The firm sells equipment throughout the world and in multiple markets. The marine business that focuses on boating hobbyists is very cyclical. Like RV’s, boats are a discretionary expense and it is an expense that will be cut when entering a recession. I believe the saying is that “a boat is a hole in the water that you pour money into.”

My Take

Fortunately, the pleasurecraft boating hobbyist segment of the business doesn’t represent the full business. They also manufacture the transmission and propulsion systems in police patrol boats, for instance. Thier products are also used in heavy machinery. A significant customer is Caterpillar, for example.

Twin Disc’s products are also used by natural resources companies, like frackers. The fracking side fueled a boom in the stock in the first half of the decade, which fueled a massive ascent in the stock price. The stock then collapsed with oil prices in 2015-16.

The stock has been punished in the last year over recession worries around the leisure boating segment. A return to the 52-week high would be a 100% increase from current levels. Steel is a major component of its products, and the market is concerned about steel prices, which is also weighing on the stock.

Oil has also struggled since the 2015-16 bust and hasn’t really recovered. The expectation is that a global recession will further reduce the price of oil by reducing demand. Oil stocks as a whole remain depressed, and Twin Disc has been affected by these worries due to its exposure to the fracking industry.

Twin Disc is also globally diversified, with 46% of sales occurring internationally. Much of the economic slowdown of late has been overseas. This slowdown, combined with anxiety about the trade war, also weigh on the stock.

Let’s recap: the market hates Twin Disc because oil is in a slump, everyone is worried about a recession, it is exposed globally, it is impacted by steel prices, and is a cyclical company.

Meanwhile, Twin Disc’s business is performing well. Sales in 2018 were $241 million compared to $168 million in 2017.

Mr. Market appears to be anxious and the company itself is still doing fine.

The market has overreacted to the company’s woes. I’m sure that at least one of the things Mr. Market is fretting over will be resolved. I think it’s unlikely that oil will remain depressed forever, for example.

As for the more cyclical elements of the business, the market has already priced in a recession for this company. It now trades below book value. The last time it was this cheap in 2009 during the Great Recession and during the depths of the oil price crash. Whenever this company trades around book value, it is an opportune time to buy.

From a valuation multiple standpoint, it currently trades at a P/E of 9.8 compared to an industry average of 19. It trades below book, and the 5-year average is 1.5x book. The current price/sales ratio also matches cyclical nadirs in the stock price. It currently trades at .59x. compared to a 5 year average of .97x. The EV/EBIT ratio of 6.97x also compares favorably to the company’s history.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.