June 17, 1998
Stocks for Dad Part I
To Dad From Paul
by Paul Larson (TMF Parlay)
First off, I must apologize, Dad, for last year's gift of Silicon Gaming (Nasdaq: SGIC). Unfortunately, your present managed to wilt instead of bloom this past year, and it broke your son's long-standing streak of giving winning ideas for the holidays. Sad, I know. I stated last year, "As investing in any development-stage company, the risks involved with this stock are certainly much higher than average." Long story short, developments didn't fall the company's way, and the stock got hacked.
Instead of trying my luck at giving you another high-risk, development-stage company from the "growth" aisle of the stock market, I think this year I will put something in the cart from the "value" aisle. Something with real earnings and cash flow that has a discounted price tag.
This year I'll give you Titanium Metals Corp.
What the Company Does
In case you are a little rusty on your metallurgy, titanium is a metal that is nearly as strong as steel, extremely lightweight, and resists corrosion very well. Titanium is finding its way into everything from golf clubs to hip replacements to airplanes. Basically, wherever strength is needed and weight is a major liability, titanium is an engineer's favorite choice of metals. Sounds like a pretty cool material, no?
Titanium Metals is the nation's largest supplier of titanium. Furthermore, the company is a major force in supplying titanium in Europe through its subsidiaries. With an order backlog of $500 million, there should be little doubt that titanium is in demand. Basically, we are investing in a leader of an exciting industry here, Pops.
Let me suggest clicking into the company's website for more information on exactly what the company produces.
Why Its Valuation is Attractive
It's rare in this market to find a stock that has an attractive "story" and also trades on the cheap relative to its cash flow and earnings. Titanium Metals is one of those rare and attractive birds. I think I can easily summarize just how attractive the earnings picture is for this company in the chart below:
Recent Price: $23 1/2
Trailing 12 Mo. FY 98 Est.FY 99 Est. Earnings $2.56 $3.00 $3.88 P/E Ratio 9.2 7.8 6.1 5-year estimated growth rate: 17.5% Current Dividend Yield: 0.6% (Source: Zacks)
Yes, that's right, you can buy this industry leader for less than 10x trailing earnings and less than 8x forward estimates for the current year. Compare this to the S&P 500, which is trading at over 23x forward earnings estimates, and there is clearly room for the market to expand Titanium's earnings multiple.
When dividing the company's earnings growth rate by its trailing earnings, we get a number less than 0.40, which is quite an attractive PEG ratio. We like companies that have P/E ratios much less than their expected earnings growth rate, and Titanium Metals certainly fits the bill.
The company's balance sheet also passes muster with $117 million in cash and merely $41 million in long-term debt. We generally don't like companies with high levels of debt, and Titanium's is extremely modest compared with the company's size and cash flow.
All this, and the stock pays a nominal dividend, too.
Probably the largest risk factor the company faces is a reliance on the health of the notoriously cyclical airline industry. Approximately 60% of the company's sales are to airline manufacturers for use in aircraft. If the economy should stall and airline production rates fall, the price of titanium (both the metal and the company) should also dive. Luckily, the company has an exclusive supply agreement with Boeing (NYSE: BA) that should act as somewhat of a buffer.
As a commodity supplier, Titanium Metals' success is tied to the price of titanium -- and the risk of the possibility of lower titanium prices. Like almost all commodity businesses, the company's fortune is intimately related to its commodity's prices. Further, for the average investor, the titanium market is not exactly the easiest to keep tabs on, so "doing homework" with the stock takes a bit of effort.
Even with these risks, Titanium Metals is an attractive stock. Simply stated, titanium truly is a metal of the future. With usage growing in double digits throughout the economy, there is plenty of opportunity for Titanium Metals to harvest profits in this industry. And with an exclusive contract with Boeing in place, the company is assured of some rather large orders that could be a true bonanza if the airline industry takes off. Again, it's rare when such an attractive "story" has such an inexpensive price tag in this market.
Happy Father's Day, Dad!
* A Stock for dad represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.