2023-09-22 16:34:44 ET
Summary
- Haynes International, Inc.'s fiscal 2023 bottom-line earnings growth projections have turned downward, with the latest estimate down over 20% in the past 6+ months.
- The technical chart shows a significant decline in share price since March, and a bearish trend is evident in the near-term chart.
- While Haynes has seen improvements in its aerospace segment and backlog, low nickel and cobalt prices are expected to continue impacting earnings growth.
Intro
We wrote about Haynes International, Inc. ( HAYN ) back in March of this year, when we recommended that investors kept on riding the stock's bullish growth trend with respect to bottom line earnings growth. In fact, at the time, it was projected that bottom line earnings were going to grow by 17% in fiscal 2023 which incidentally finishes this month (September 2023). Forward-looking earnings expectations, however, turned over quickly (to the downside) for Haynes and now we are at a point where the latest bottom-line estimate of $3.34 per share is down over 20% over the past 6+ months alone.
Suffice it to say, that if this $3.34 EPS projection is met for the year, it would result in more than a 6% decline over the previous year. Furthermore, if earnings expectations continue to dwindle, Haynes' share price will most likely suffer as we learn below.
The technical chart priced in the significant turnaround pretty quickly as we see below with shares down over 22% since they topped out in March of this year.
If we go to a more near-term chart, the bearish trend unfortunately looks more glaring. We state this because the upcycle trendline (going back to October of last year) recently got broken to the downside. Furthermore, given how volume trends many times precede share-price action, we see a similar bearish trendline break back in August on the OBV or 'On balance volume' trendline. Both of these occurrences are sure to put pressure on Haynes' share price over the near term.
Recent Q3 Trends
Although a cybersecurity incident adversely affected operations in June of this year (to the tune of approximately $0.43 per share), management was quick to point out the fundamental improvements happening within the company.
Take the aerospace segment, for example. Despite the outages in Q3, Haynes' aerospace segment grew its sales by 27% over a rolling quarter basis and by 16%+ over the second quarter of this year. Leap engine demand continues to go from strength to strength but supply-chain constraints mean that 'build numbers' continue to lag what the market really needs in terms of manufactured numbers.
Suffice it to say, we were not surprised to see Haynes' backlog print a new record in Q3 which now comes in at almost $470 million. However, whereas in times past, a percentage of the market may have been pricing Haynes stock off its growing backlog, we do not believe this will necessarily be the trend going forward. In fact, Haynes' growing inventory ($411+ million at the end of Q3) when coupled with the company's growing backlog is really two sides of the same coin. Bulls actually need both of these elevated numbers to come down quickly, which would be a strong sign that product is finally being turned over at a faster pace .
To combat sustained supply chain headwinds in the markets Haynes sells into, the company continues to add value on the front end with respect to the development of its alloys. Haynes' most recent temperature alloy for example (Haynes 223 Alloy) looks like it will have plenty of applications across many markets due to its versatility. Then you have how the company has been able to meaningfully improve its breakeven point in recent times. Haynes still managed to be profitable in Q3 for example (net profit of $8.8 million) off a lower-than-expected volume print due to the outages.
However, the market is primarily focused on one area which is earnings growth, and here is where Haynes may be found wanting in upcoming quarters. In fact, the CFO on the recent Q3 earnings call touched on how low nickel & cobalt prices would continue to put downward pressure on the company's earnings going forward. Furthermore, as we see from consensus' forward-looking earnings revisions on the chart below, trends have been bearish over the past 3 months and this is what the market is reading into (illustrated through recent bearish action on the technical chart).
Conclusion
To sum up, although significant demand (as we see in the company's record backlog) exists for Haynes International, Inc. products in the markets it serves, this demand is still not doing enough for investors in terms of sustained earnings growth in the company. In fact, bottom-line earnings are now expected to come in 6%+ lower compared to fiscal 2022 which is a far cry from what was expected just six short months ago. We foresee shares sliding somewhat (maybe 10 to 20%) over the near term as a consequence. We look forward to continued coverage.
For further details see:
Haynes International: Reduced Earnings Outlook Pressure Shares Over Near Term