Harsco Corp (HSC, Financial) celebrated its sesquicentennial some 10 years ago, making this lesser known, $1.5 billion market cap industrial company about 160 years old. Its three (3) operating groups lead in their respective categories: Metals & Minerals service steel mills and represents about two-thirds of its revenues; Rail Services about 15%, and Industrial Services include a broad range of industrial plants and energy exploration / processing for the remaining diversification of about 19%.
Subject of weak analyst review who scan headlines capitulated when HSC missed consensus earnings last week and the equity revisited multiyear lows now in the teens. Analysts were expecting $1.07 for the year ending 2014 but were let down by revisions 20% lower. The company announced write downs from two customers; one Italian steel mill, the other Canadian. Together these trimmed $16.8 million from the bottom line, but represent one time charges.
Piling on to the current period, management embraced an organization efficiency project, code name "Project Orion." According to management, Orion will improve financial returns and provide higher levels of value added services, namely by improving the bid / contract process, and simplifying operational structures. Add another $12.0 million in charges related to phases one and two of the Project during 2014 and you can see why the company missed so badly.
But where do we go from here? Operating improvements during 2014 delivered compensation savings of approximately $6 million and expected to save another $17 million in 2015. Annual recurring benefits from compensation and other operational savings after Orion are expected to be approximately $37 million. Adjusted return on invested capital is expected to range from 7.5% to 8.5% compared with 6.6% in 2014.
Looking over our shoulder, courtesy ThinkorSwim, a weekly chart shows previous HSC bouts with reduced earnings and compressed P/Es. The chart reveals 2009 and 2012 strong support at $20 rewarded loyal shareholders (or at least those with some conviction). The stock returned to $38 and $28 in 2010 and 2013, respectively. The important difference between the recoveries was the company jettisoned an infrastructure division so the comparison isn’t perfect but explains the difference.
In any event, looking even closer, HSC is shareholder friendly. My data going back to 1999 shows a consistent dividend growing from $0.45 then to $0.82 today. Granted there’s been some stagnation in the top line dividend since 2011, but keep in mind the lower operational base without the Industrial Division. Also consider that HSC increased its dividend during the market’s abyss of ’08 –’09.
The trade and how to express your opinion:
Interested yet? HSC’s 15-year average dividend yield is a handsome 3.8%. But given today’s discount closing at $16, HSC now yields 5.125%, easily a home for excess capital earning zilch in a bank account. Add the incentive for management to execute on its Project Orion … and if ROI hits 8%, HSC can easily return north of $20, at which time yield compression may take hold, and I’d consider reallocating. Target here is at least $21.58 ($.82/3.8%), on a historical dividend valuation. Importantly for many, this is the basis where HSC will trade. For me, this represents an upside of 36% above its current quote.
Alternatively, most who know me know I look to express the trade using options. Writing / selling when volatilities are ripe generally skew the risk / reward to my favor. But that’s not the case for HSC, at least not today. I initiated new trades on HSC when implied volatilities were higher and importantly option spreads (bid / ask) were more reasonable (closer together). Generally, as a Put Option writer, I’m looking for ROI and every advantage. Have a look for yourself, courtesy TOS.
Considering HSC … the dividend yield and opportunity for the underlying appreciation, I’m going long and added to existing underlying positions. Upside to low/mid $20s in a reasonable timeframe … and willing to collect 5%+ in the interim.
