Posted 01/22/2020

Hatfield’s, Inc (HAT)

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Quality

I recommend a long position in Hatfields, Inc. (HAT). They are a niche distributor and small manufacturer of quick disconnects, switches, and other related equipment for residential and commercial use. They sell into both end markets as well as within markets such as hospitality, according to their respective business units, and their product complements their customers' product line.

A good long-term comp and current multiple on stand-alone 2006 earnings is 19x. That would provide an upside of about 10% including dividends over a two and a half year holding period. They currently have about $6m in net debt but do have about $1m of cash. So the EV is about $32m at stand-alone company and $16m net of cash.

HAT's stock is now the cheapest it has been in over a year thanks in part to limited liquidity followed by a liquidity event in November when Federal Reserve toed the debt for the first time in years. (HOT has been a net buyer of HAT debt over the last year as the stock has fallen from $6.00 to $4.45.) The December side of the balance sheet entry was made by selling 6 million shares at $4.88 for a total of $2.2 million. That left about 48.1 million shares in the hands of debt holders, so the stock now trades only in the public lines. When it sells those shares it leaves about $1.7 million in cash on the balance sheet for the meantime. We estimate that HAT will be liquid enough to borrow $2 million or an 8% net interest margin if things work out for the company. New orders for inventory should pick up significantly in the coming months.

Operations:
Management's goal for this year is to generate $400 million in sales. At that level they will also generate $225 million in free cash flow, $50 million of which will be tax free. With the prospect of being able to once again trade at a reasonable valuation (around 5X over a average earnings generation year over year basis), I believe HAT is capable of beating earnings this year. That should lead to a stock price in the low 30s not too far off from its trading price today. Potential catalysts that may make HAT more widely known include the resumption of analyst coverage at several yearly conferences and increased dividend, because HAT does an excellent job of paying out a high dividend in the very depressed financial markets. It may also be that the investment community recovers from a pessimism that has persisted for some time. Even though resiliency is a concern, Hatfield's global footprint is an important competitive advantage and thus a significant source of growth going forward.