Tuesday, August 11, 2009

Cruising For Profits

Twin Disc (TWIN) manufactures and sells power transmission equipment (torque converters, propellers, clutches etc) to the marine industry. Due to the fixed-cost nature of such heavy manufacturing, one might expect this company to have dipped deeply into the red in its fiscal year ended June, 2009. Indeed, as recently as four weeks ago, the company traded for just $6.50 per share, after earning $2 per share in its 2008 fiscal year!

In the last four weeks, however, the shares have almost doubled, after the company reported earnings per share of $1 for its fiscal year ended June, 2009. But all the signs were there that the company's profitability was more buoyant than its share price. Astute value investors enjoyed the dramatic gains in this company's stock.

What has helped the company stay profitable through this downturn is its diversified customer base. While the mega yacht market may be taking a breather for a while, backlog for military customers has remained strong and in some cases increased from last year.

As evidence of the company's financial viability, its earnings through the first three quarters of fiscal 2009 remained relatively solid. Through the first 9 months of the year, TWIN generated operating income of $14 million; yet its market cap hovered around $70 million just three weeks ago, despite the company's reasonable debt to total capital ratio of 37%.

Despite the market's recent runup, for those looking for value, plenty of gems remain available.

Disclosure: Author has a long position in shares of TWIN


Law student + NCAV investor said...

can you tell us what role "low volume" should play in picking a stock? TWIN has very low average volume, does it necessarily imply that the sell-price of the stock in this kind of environment will be necessarily lower than the market price.. versus higher-volume stocks where this liquidity problem would not matter?

Saj Karsan said...

Hi Law,

You will find two schools of thought on this. There are many who believe a discount should be applied to a company based on its liquidity. Value investors, however, tend to focus on buying a business (not a stock) for the long term, and so for them liquidity is often not a concern.