Hawk Corporation - Prey or Pray?
We stumbled across what to us was a very strange thing, a page on the MarketWatch site about Hawk Corporation (AMEX: HWK).
What we found so strange was there not a single newsletter about the company, not one. There were no recommendations, no limit orders, no upgrades, no downgrades, no related equity holdings, no wrap that rascal signs, no nothing. It was almost as if the company did not exist.
When we mentioned our findings to several of our investment manager friends, they all said the same thing, don't waste your time it must be a crappy company.
Yippie!!!; just the kind of company we love to check out.
Financial information related to Hawk Corporation contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 10, 2010.
What They Do
Hawk Corporation is a leading supplier of friction products for industrial, aircraft, agricultural and performance applications, focusing on designing, manufacturing and marketing products requiring sophisticated engineering and production techniques for applications in markets in which the company has achieved a significant market share.
Their friction products include parts for brakes, clutches and transmissions used in construction and mining vehicles, agricultural vehicles, trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and general aviation.
The company's friction products typically provide the wear surface in a brake or clutch application, which is highly engineered to perform in a given application. These products are principally made from proprietary formulations and designs of composite materials and metal powders. The company also manufactures fuel cell components.
The company was founded in 1989, and is a holding company that through its subsidiaries enjoys customer relationships that span 50 years or more, with a manufacturing history dating back to 1920.
The trend for this stock is upward, with price just coming off of, but not quite reaching, an oversold condition. With current price levels almost 2.5% above the 13 day moving average, and 11% above the 50 day moving average, we simply don’t see an opportunity for a short-term trade at this time.
Short-term traders should also pay attention to current resistance and support levels. Current resistance for the stock is $23.94 and current first support is $19.52, with second support at $16.50.
Based on a recent close of $23.14, reaching resistance would be a 3% gain, while falling to first support would be a 16% decline, which should reinforce for short-term investors there is far more downside to the stock than upside.
Long-Term (5 Year Hold) Investment
We like what the company does. We think that the company’s products lead the industry. We wonder, going forward, if demand for the company’s products will increase?
The company does have several investment quality metrics in its Current Ratio at 4.55, its Quick Ratio at 3.47, its Cash Ratio at 2.61, and its Free Cash Flow of $2.40 per share, all exceed our investment criteria.
There also several metrics in which we would like to see improvement. To us, Return On Invested Capital, ROIC, is poor at 10%, and while the Debt to Cash Ratio is positive at 0.93, the company simply pays to high an average interest rate at almost 10.5%.
In addition, that management allowed the company to spend more on stock repurchases than on debt reduction is almost unforgivable, since to us, there is simply no reason this should ever occur.
Admittedly, such a misstep on the part of management, coupled with recent SEC filings calls into question the entrepreneurial spirit of management, at least in our opinion, and makes us wonder why the long-term investor doesn’t seem to fit in, to management’s considerations.
Based on our review of the company’s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $31 to $34 range, and that a reasonable entry target is in the $14 to $17 range, an entry point supported by our Graham number of $15, and our Relative Value number of $23.
The company may indeed manufacture products far superior to those of its competitors, just as it’s subsidiaries may continue to enjoy business relationships established more than 50 years ago.
What we wonder however, is just how much friction will be generated by investor’s rear ends if voters, (aka consumers) continue to apply their brakes to the world economy?
To download the Wax Ink Hawk Corporation Raw Value Worksheet, please click here.