Twin Disc [TWIN] Stock Analysis

Reader Michael B. wrote in to contribute his analysis on TWIN, Twin Disc Incorporated.

“TWIN has superb potential to be a big mover for months to come. The main reason is that TWIN is in a very hot sector right now. They make power transmission products installed in the drivelines and power-trains of farm tractors, road pavers, cranes, mining trucks, oil rigs, fire trucks etc. They manage and control the horsepower generated by internal combustion engines and electric motors. They are seeing strong demand across all of its end markets, especially from its oil and military customers. On the military side, the co supplies transmissions for the Army’s M88A2 Hercules combat recovery vehicle, a full tracked armored vehicle used to perform rescue and recovery of heavy tanks. As you can imagine, demand for replacement transmissions is large given the required power of these machines in the scalding heat in Iraq. Take a look at charts of SPAR and FRPT to see how these “military” plays have been taken up recently. And as we all know, the oil sector has been performing quite well lately also.

TWIN reported fantastic earnings on April 24. EPS was $1.27 vs. $0.64 a year earlier. Revenue rose 35% yr/yr to $86.4 million. Co said “With our six-month backlog at a record $118.4 mln, the preliminary outlook for FY08 is encouraging….The industrial cycle that began in earnest in 2004 remains strong. We continue to see positive trends.” In my opinion, TWIN is trading at only 17x LTM EPS of $3.91 which is still too cheap for a company which is growing earnings 100%. The company has said that Q4 will be better than Q3 and that next FY will be even better than this fiscal year. How can anyone argue that this company is overvalued?

Since those earnings were released, TWIN has gone up from $47 to as high as $69.60 (closing at $64.61 on Thursday). One might get scared that they have “missed” the run-up, but this company is still quite undervalued at this price and a target of $85-$90 is not out of the question sometime in not-too-distant future. The company also pays a quarterly dividend. Last time TWIN was trading in the $60’s, the company announced a 2-1 stock split (Jan 24, 2006). So in 16 months, the stock has more than doubled.

The float on TWIN is only 4.6 million shares:

Institutions are holding about 2.5 million shares

The stock market chart on TWIN

Looks like very good support in the $58-$60 area.

I initiate my position at earlier today, but wish again to remind you to do a full due diligence on your own before buying this security or any other that I have discussed.”