Twin Disc Ready to Shift Into Overdrive

Twin Disc (TWIN - commentary - Cramer's Take) is a misunderstood, undervalued and undiscovered stock that has been unfairly punished in the recent market downturn.

Based in Racine, Wis., TWIN manufactures transmissions and power-control systems for massive machines in three major categories:

1. Oil-drilling rigs
2. Heavy-duty trucks and military vehicles
3. Large boats used for offshore oil-drilling rigs and yachts

TWIN has the No. 1 or No. 2 two market share in virtually every area in which it competes. The company is enjoying strong demand in nearly all of its end markets, particularly the oil and military markets. Anyone who follows companies geared to the oil and military markets knows these markets are projected to remain strong for the foreseeable future.

The company continues to improve its profitability by increasing productivity, outsourcing certain low-margin manufacturing functions and leveraging its cost structure. It's run by a very conservative management team, which owns more than 20% of the company's stock, so its incentives are highly aligned with other shareholders'.

TWIN reported earnings earlier this week, and I think the company's strong results were obfuscated by several one-time charges. For the fiscal year ended June 30, 2007, the company reported fully diluted EPS of $3.68, which implies a 13.7 P/E. However, the reported EPS had a total of 29 cents of nonrecurring charges (mostly for a highly accretive restructuring of its Belgium operations), so I think it is appropriate to add back these charges, which implies an adjusted EPS of $3.98.

Based on its current stock price, the company trades at 12.7 times adjusted EPS, which I think is too cheap. The company has experienced tremendous growth in recent years due to strong organic demand and the impact of some highly accretive acquisitions.

TWIN's management recently indicated that growth will moderate this year relative to last year, when organic revenue increased 15%, and organic EPS increased even more. However, management also stated that it expects margins to remain flat or perhaps increase this fiscal year.

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At the time of publication, Fields was long Twin Disc.

Ephraim Fields is the general partner of Clarus Capital, a long/short, value-oriented U.S. equities hedge fund that emphasizes free cash flow analysis. Before entering the hedge fund world, he spent over 10 years as an investment banker on a variety of private equity, M&A, debt, equity and restructuring transactions. Fields appreciates your feedback; click here to send him an email.