This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.
Haynes International Inc. is a $450 million equity market cap manufacturer of nickel and cobalt high temperature (HTA) and corrosion resistant (CRA) alloys. While we have known Haynes from a research perspective for over a decade, we finally got the opportunity to purchase a position in the company in the second quarter, as its shares sold off from over $45 per share in January to our entry point of roughly $35. While the stock price decline provided us an opportunity in line with our patient buying approach, we also feel the investment is quite timely given the expected acceleration of the company’s aerospace related sales and a likely strong improvement in free cash flow, as it wraps up a major capital expenditure program to increase production levels nearly 50% at its core Kokomo Indiana mill.
Haynes meets all the tenants of our Third Avenue investment philosophy. Haynes has a rock-solid balance sheet with no debt and over $5 per share in net cash. Indeed, we foresee the balance sheet continuing to strengthen as capital expenditures fall from $22 million in 2017 down closer to maintenance levels of roughly $5 million, and free cash flow conversion should re-approach 100% of net income.
Haynes also provides near and long term visibility to grow revenues and earnings. Haynes’ alloys are in high demand across the economy from healthcare to industrial uses. Growth in shipments to narrow-body airframe engine platforms for both Boeing and Airbus look particularly compelling due to both the long term backlog of units to build and from the significant amount of new dollar content Haynes has on these engines.
At our purchase cost of roughly $35 per share, we see compelling upside of over 35% to our NAV–a nice potential return given the downside protections provided by its cash flow and balance sheet position, as well as from a potential resource conversion event due to the likely interest in the company from larger strategic peers.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 17, 2017.
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Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.