Top picks 2012: Twin Disc

If you are looking for a solid growth company currently trading at a discount, then I strongly recommend Twin Disc, Inc. (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 P/E ratio of only 11.57 times earnings. Further, the company is absolutely swamped with demand.

Twin Disc, is primarily in the business of producing and selling heavy duty off-highway power transmission equipment, marine transmissions, surface drives, propellers and boat management systems.

This company began 91 years ago, founding a company that made the first �twin disc� clutch for tractors but now has evolved into a company that manufactures and sells its products not only for pleasure craft, but for military marine markets, government and industrial, energy and natural resources and commercial markets.

The company has just introduced the Express Joystick System (EJS) to the marine market and is in the development of its 7500 series transmission which is in the final testing phase.
Twin Disc is backlogged 6-months as it works to keep up with the demand for its products.

For the first three quarters of 2011, Twin Disc, Inc. has seen its net income more than double from $4,034 (M) December 2010 to $9,581 (M) in September 2011. �

Earnings grew by 45.6% this last quarter. Its gross margin is up 35.9% and has an overall growth rate of 39%. It pays a small dividend of just under 1%.

While its marine transmission business is diverse, TWIN has seen a boost in its revenues indirectly due to higher oil prices, which has allowed the oil and gas markets to boost its orders for TWIN marine transmission products use in offshore drilling marine craft.

There is risk that if oil prices fall sharply in 2012, orders from this segment may be affected.

Yet, if the Fed continues to intervene in the marketplace to hold up the financial markets, oil prices could stay elevated as they have for the last few years.

TWIN is also benefiting from growing demand in the aftermarket, industrial and airport rescue and firefighting (ARFF) markets that have also added to its profitability.

Unlike some of its peers, the stock aggressively bounced back following the sell-off in the stock market in the third quarter to establish a three-year high and it is still selling at a deep discount to its intrinsic value.

From my perspective, 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.

The stock got as low as $23 last October but then shot up to $47 a share when investors spotted this value. Look to buy TWIN in the $25-$30 range with an upside target of $56.