Follow up on last week's screen results
Value, growth, income. We’re all familiar with classifying stocks based on investment objective. What’s rare is finding a stock that has characteristics of all three – strong earnings growth, decent dividend income and below market valuation metrics.
Last week, I summarized some results from CAPS screener using the default ‘high growth’ parameters. One of those hits, Hawkins, Incorporated (HWKN) had characteristics of value, growth and income. Forward PE of 7.44, annualized earnings per share growth of 17.4% over the past five years and a dividend yield of 2.6%.
To see if there were other similar value-growth-income hits I reran the high growth screen adding a minimum dividend yield criteria of 1.5% and a maximum trailing twelve-month PE of 10. The screen returned eight hits, including HWKN. Most of those were energy companies (BTE, ECA, EXLP, and WH). The other picks were a shipping company (DSX), an insurance company (UVE) and VALE, the Brazilian miner.
While those may all be great companies, other than UVE, they’re all cyclical and I’m looking for a steady grower. That leaves the favorite from last week, Hawkins.
HWKN is a chemical company serving customers in water treatment, the industrial sector and, until recently, pharmaceutical companies. In late May, HWKN announced it was discontinuing retail pharmaceutical operations. That division only accounted for 2.8% of sales and had been operating at a loss. HWKN will continue to sell bulk chemicals to pharmaceutical companies through its industrial division.
There are two remaining operating divisions – industrial and water treatment. Industrial sales contributed $201 million to total revenue and water treatment contributed $82.8 million. Both segments grew revenue substantially through a combination of higher prices (they were able to pass higher commodity prices through) and volume growth.
On 4 June, HWKN reported 4th quarter and FY 2009 results. Results were very strong compared to year-ago results, but quarterly results fell four cents short of the analyst’s 54 cent estimate. FY2009 sales were $284.4 million compared to $186.7 million in FY2008. Full year FY2009 earnings were $2.32 per share compared to $0.89 in FY2008.
HWKN has new manufacturing facilities in Illinois and Minnesota that are expected to be operating by mid-summer. CEO John Hawkins stated, “We believe that this additional capacity will aid us in better serving our customers in these markets and provide us with the opportunity to grow our market share.”
The balance sheet is a thing of beauty. $29.5 million in cash with zero debt. I believe no debt is a huge advantage for companies right now. There’s no need to rely on uncertain credit markets and the company is in a position to either acquire or expand market share while competitors are struggling to survive.
HWKN also sits in a good place with market cap. It isn’t currently shown as a member of any major indices, but at a little over $200 million it should be knocking on the door of the Russell 2000. If it were to join the Russell 2000, it would pick up some institutional buying from ETFs and index mutual funds.
Strong growth during a recession for both segments should turn into outstanding growth when the economy stabilizes. The water treatment segment should offer a great combination of demand that isn’t dependent on economic conditions with demand growth due to population growth. All that and you get paid to hold the stock.
I tried CAPS’ new limit order for new picks and was too greedy with the start price to get a trip on Friday. I adjusted the start limit (generally a bad practice in real life) to have a better chance at getting HWKN on my scorecard.
I haven’t bought any HWKN in real life, but will be looking over my portfolio to see if there’s room for a growing, income producing, small cap chemical company.