Top picks 2012: Twin Disc
This maker of marine power transmission systems has solid earnings, new products, order backlogs and looks like a bargain.
By Dennis Slothower, Stealth Stocks
If you are looking for a solid growth company currently trading at a discount, then I strongly recommend Twin Disc (TWIN).
The company is expected to grow at 45.6% in fiscal 2012, but is priced at a bargain relative to its intrinsic value ($56), with a price-to-earnings ratio of only 11.57 times earnings. Further, it is absolutely swamped with demand.
Twin Disc produces and sells heavy duty off-highway power transmission equipment, marine transmissions, surface drives, propellers and boat management systems.
The company was founded 91 years ago and made the first "twin disc" clutch for tractors. Now, in addition to the marine market, it serves government and military, energy and natural resources, and industrial customers.
Twin Disc has just introduced the Express Joystick System (EJS) to the marine market and its 7500 series transmission is in the final testing phase. The company is backlogged six months as it works to keep up with the demand for its products.
For the first three quarters of 2011, Twin Disc has seen net income more than double. Earnings grew by 45.6% this last quarter. The gross margin is up 35.9% and the overall growth rate is 39%. It pays a small dividend of just under 1%.
While Twin Disc's marine transmission business is diverse, the company has seen revenues rise as a result of higher oil prices, which have boosted orders for products used in offshore drilling craft. There is risk that if oil prices fall sharply in 2012, orders from this segment will be affected. But oil prices could remain high if the Fed continues to intervene to prop up the financial markets. Twin Disc is also benefiting from growing demand in the airport rescue and firefighting markets.
What I look for in a stock is a company with solid earnings, selling at a bargain, with an established technical pattern of higher highs and higher lows over the previous few years. TWIN got as low as $23 last October but then shot up to $47 when investors spotted this value. Look to buy in the $25 to $30 range, with an upside target of $56.
See all 50+ stocks in our Top Picks Report 2012.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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