In case it's not obvious from the name, Quanex (NYSE:NX) is in the steel business. Specifically, it produces engineered carbon and alloy steel bars, aluminum flat-rolled products, and precision-formed metal and wood products. Don't know what that means? It turns out Quanex has two primary divisions: steel for vehicle manufacturing and various metals for homebuilding applications. These two divisions accounted for 83% of the last 12 months' $1.23 billion in revenue.
At first look, the stock appears to be very cheap at 0.58 times sales, with a forward price-to-earnings ratio of 11.6 and a PEG of 1.02. After looking at some other numbers, Quanex, with 15% gross margins and estimates for revenue growth just shy of 4%, trades in line with the sector.
What is the catalyst to make someone want to own this stock? Quanex has done a great job in exceeding analysts' earnings estimates. Its revenue growth over the next five years is expected to be 12% vs. 10.1% for the sector. Quanex has raised its dividend in nine of the last 15 years and currently yields 1.55%.
Another thing that catches my attention is that China is not a huge source of revenue for the firm. If Quanex stays away from China, it would allow the business to grow without excess volatility that comes from doing business in an emerging country trying to learn how to manage growth.
With the demand explosion that is expected for autos in China, though, Quanex will have to at least investigate the idea of doing business there. If it decides to do business in China, it could lead to huge revenue expansion. I think this issue is a win-win because without China, investors get slow, steady, predictable growth. With China, investors get a huge demographic catalyst for explosive (albeit more volatile) growth.
The insider transactions and major shareholders interest me as well. Over the last six months, insiders have sold only 74,000 shares -- not a big number. The stock is also 89% institutionally held; I have written about the potential benefits of this. In this instance, the list of institutional investors is a who's who of the small-cap value world.
As a metals company, this is a cyclical stock. As the recovery matures and the yield curve flattens, cyclicals may rotate out of favor. That is the negative argument. But for investors who want to be fully diversified, Quanex gives you a company that has been in business since 1927, is focused on shareholder value, and is increasing the dividend.
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Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.
