2023-12-11 08:10:23 ET
Summary
- Haynes International has seen a significant backlog increase and expects new cash generation from 2024.
- Analysts expect positive free cash flow generation in 2024 and 2025, and the company's focus on fuel-efficient aerospace engines and new alloys could lead to increased margins.
- While there are risks from inventory management, higher raw material prices, and competition, Haynes International appears undervalued.
Haynes International, Inc. ( HAYN ) recently delivered a significant backlog increase and beneficial expectations about new cash generation from 2024. Most analysts out there are expecting FCF generation in 2024 and 2025. Additionally, given the need for fuel-efficiency aerospace engines and the development of new alloys such as the HAYNES HR-224 alloy, I expect FCF margin increases. I did find risks from inventory management, higher price of raw materials, or competition, however HAYN does look cheap.
Haynes International
Haynes International is a world leader in the development, production, and distribution of high-performance nickel and cobalt alloys. Its products, primarily sold in aerospace, chemical processing, and industrial gas turbines, include high temperature and corrosion resistant alloys.
With specialized facilities in Indiana, Louisiana, and North Carolina, the company employs a unique model that combines its own factories and service centers. Its strength lies in innovation, development of new applications, and focus on differentiated products and services.
Haynes International excels at selling its products through a direct sales organization with 14 locations in the US, Europe, and Asia. 75% of net revenue comes from direct sales, supported by 11 sales and service centers operated directly by the company.
The marketing strategy focuses on providing technical support, offering performance analysis, and collaborating closely with clients to develop customized solutions. Although international expansion is a priority, the majority of revenue still comes from US customers . In my view, the company stands out for its ability to obtain direct information from customers as well as to develop proprietary alloys to meet their needs.
Balance Sheet, And Contractual Obligations
As of September 30, 2022, Haynes reported cash and cash equivalents worth $8 million, accounts receivable of about $94 million, and inventories close to $357 million.
The largest assets are represented by inventories. They are close to 50% of the total amount of assets. I do not like the fact that inventory turnover declined in the last decade. However, I do appreciate that total inventory increased significantly. It means that Haynes International is confident about the future of the business model. In my view, managers out there would decrease their inventory levels if they were expecting detrimental business expectations.
With property, plant, and equipment of about $142 million and total assets of close to $632 million, the asset/liability ratio is larger than 2x. I believe that the balance sheet remains stable.
The fact that accounts payable is close to $54 million means that providers do not really offer a lot of financing to Haynes International. As a result, the company needs to receive financing from banks. Apart from the total amount of debt, Haynes International also reported pension obligations that I included for the calculation of the net debt.
With revolving credit facilities of about $74 million and long-term obligations worth $7 million, accrued pension benefits were equal to $21 million, with accrued postretirement benefits of $60 million.
Through September 30, 2023, Haynes International, Inc. has renewed its line of credit with JPMorgan Chase Bank ( JPM ) for $200 million, with outstanding loans of $114,843 classified as long-term. The loans bear interest at the company's option, tied to the prime rate or daily adjusted SOFR, and the maturity date has been extended to June 20, 2028. Given the EBITDA expectations and FCF generation expected for 2024 and 2025, I am not really concerned about the total amount of obligations.
I studied a bit the interest rate reported in the last annual report. Given that the credit agreements included interest rates close to SOFR plus 2.00% - 2.50% per annum, I believe that assuming a cost of capital close to 7% and 12% appears reasonable.
Expectations From Other Analysts, Guidance From Management, And Recent Backlog Increase
Given the expectations from other analysts for 2023, 2024, and 2025, I decided to show some market expectations . 2025 net sales are expected to be close to $637 million, with 2025 EBITDA of $103 million, 2025 EBIT close to $80 million, and 2025 net income of $59 million. Finally, 2025 free cash flow would stand at $50 million. I would also like to note that FCF growth in 2023, 2024, and 2025 is expected to be positive, which may lead to stock price increases.
The guidance from management given in the most recent presentation was also quite beneficial. Management explained that there were top line growth and gross margin improvement among its expectations. Besides, Haynes noted that cash generation will most likely start from 2024.
In addition, I believe that it is worth having a look at the words from the CEO, which do not only include beneficial estimates. Mr. Shor noted the recent backlog increase of close to 23.2% as well as revenue increase in the fourth quarter.
With the words of management about the recent backlog increase, I believe that noting the increase in backlog since 2019 appears necessary. Note that backlog growth increased in 2020, 2022, and 2023.
Investments In Emerging Markets And Increases In Volumes Could Bring Net Sales Growth.
Haynes seeks to improve commercial performance by offering differentiated, high-value products and services, setting prices accordingly and reducing costs to expand margins. I believe that the company has achieved a significant reduction in its breakeven point, capitalizing on the increase in volumes. In addition, it explores opportunities in emerging markets such as clean and renewable technologies.
Further Invention Of New Allows And Work With Customers Will Most Likely Bring FCF Margin Increases And Net Sales Growth
The company works closely with customers and end users of its products to identify opportunities to manufacture new high-performance alloys. Haynes International is currently working towards the commercialization of HAYNES HR-224 alloy, which is the HTA product with superior resistance to oxidation and excellent fabricability. There is also the process of HAYNES HR-235 alloy, which appears to have excellent resistance to metal dusting in high temperature carbonaceous environments.
Besides, in my view, Haynes appears to be increasing the R&D/Net sales, which may lead to proprietary alloys with multiple applications in the coming years.
We saw increases in R&D in 2023. Research and technical expertise increased from close to $3.8 million in 2022 to close to $4.1 million in 2023, but the long term upward tendency appears multiyear.
Recent Momentum In The Average Selling Price Increase, And Expected Growth Of the Global High Performance Alloys Market
From 2019 to 2023, Haynes saw the average selling price increase in the aerospace, chemical processing, and industrial gas turbines business segments. From $24 in 2019, the price increased to close to $31. We are talking about a price increase of close to 30%. In sum, there is significant momentum in the price, which may continue in the coming years.
According to experts, the global high performance alloys market is expected to grow at close to 5.36% CAGR from 2023 to 2032. Given the recent increase in the average selling price and the numbers from the global high performance alloys market, I think we could see further inflation in the price.
The global high performance alloys market size was valued at USD 9.9 billion in 2022 and is expected to hit around USD 16.7 billion by 2032, growing at a CAGR of 5.36% over the forecast period 2023 to 2032. Source: High Performance Alloys Market
Desire For More Fuel-efficiency And Single-aisle Aircraft Build Rates Could Bring Net Sales Growth And FCF Margin Expansion
In my opinion, the demand for fuel-efficiency and lower emissions will most likely bring new engine platforms. As a result, Haynes International could benefit from higher FCF margins and net sales growth. I assumed that new technology sold could be a bit more expensive, and may also enhance profit margins.
Over the past five years, aerospace demand was favorably impacted by the transition to new engine platforms driven by a desire for more fuel-efficiency and lower emissions. Source: 10-k
Overall, management was optimistic about single-aisle aircraft build rates and additional potential increases in the average selling price per pound. As a result, sales in the aerospace business segment could continue to trend higher. In this regard, I believe that investors would do great by having a look at the lines below.
One of the Company's core focus initiatives was to be compensated for value provided, which contributed to the revenue increase in fiscal 2023 with the average selling price per pound increasing. This contributed to fiscal 2023, being a new Company record year in revenue into the aerospace industry. Single-aisle aircraft build rates and additional increases announced in the industry show significant growth expectations going forward. Double-aisle build rates are just beginning to increase, which should be a positive contributor to sales into the aerospace market going forward. Source: 10-k
My Income Statement Expectations, And Cash Flow Expectations
Based on previous assumptions, I assumed the following financial figures. 2023 net revenue is expected to be close to $1.806 billion, with cost of sales of about $1399 million, and 2033 gross profit of about $406 million.
Additionally, with selling, general, and administrative expenses close to $68 million, research and technical expenses worth $7 million, and operating income of about $330 million, I also assumed interest expense of about $42 million. Resultantly, 2033 net income would be $247 million.
My cash flow statements include 2033 net income of $247 million, depreciation of $12 million, 2033 stock compensation expense close to $2 million, and changes in accounts receivable of $41 million. Additionally, I included changes in accounts payable and accrued expenses of close to -$155 million, changes in accrued pension and postretirement benefits of close to $51 million, and net cash provided by operating activities of close to $158 million. Finally, 2033 FCF would be $158 million.
DCF Valuation
Given the previous cash flow statement, my DCF model included a WACC of about 7%-12% and exit multiple of 8x-15x. The implied equity forecast would be between $608 billion and $1.5 billion.
I also obtained a forecast price between $48 and $121 per share with a median of $62-$99. The median internal rate of return would be close to 6%-8%, however under certain conditions, I also obtained double digit returns.
Risk
The industry where the company operates faces significant risks due to high capital investment and fixed costs. In the fiscal year 2023, approximately 48% of total costs of sales were attributable to raw materials. Profitability is highly sensitive to changes in volume, and occasional price concessions may occur in key markets. Intensified competition, especially from competitors producing stainless steel and high-performance alloys, presents challenges. Maintaining market share requires effective cost management and value-based pricing to ensure long-term profitability and competitiveness.
Competitors
In my opinion, Haynes International operates in a highly competitive market with eight to ten major producers, facing rivals such as Special Metals Corporation and ATI Inc. ( ATI ). The competition includes domestic and foreign manufacturers of high-performance alloys as well as other emerging materials such as plastics and ceramics. The strength of the US dollar and competition from non-US entities, especially in Eastern Europe and Asia, are also challenges.
The company has responded to competition through constant alloy development, by focusing on value-added services and improvements in efficiency and costs, highlighting its commitment to innovation and continuous adaptation.
My Conclusion
In my opinion, Haynes International is a market leader, which is successfully prioritizing security and improving efficiencies to boost margins. Its unique business model, combining factories and service centers, strengthens the relationship with customers. I believe that recent increases in R&D/Net Sales and current development of new products like the HAYNES HR-224 alloy could bring beneficial expectations from market participants. Additionally, the need for fuel-efficiency aerospace engines, increase in volumes, and backlog increases could lead to FCF margin growth. Yes, I did find risks from inflation in raw materials, inventory risks, or competition, however Haynes does look undervalued.
For further details see:
Haynes: Backlog Increase, Incoming New Alloys, And Cheap