A company we spoke of last week, Hawk Corporation HWK is surging on news that it has hired advisors to investigate possibilitity of increasing shareholder value which would include the potential sale of the company. Hawk is a diversified industrial goods company that also makes alternative energy fuel cells. It should be noted that Mario Gabelli of GAMCO Investors owns 13% of the shares.

Hawk becomes the second holding of ours that is “in play” in the past month. RCM Technologies RCMT is the target of a hostile takeover from CDI corp. This does take some of the bitter taste away from a miserable market.

Hawk Corp.
Market Cap $212 million
Book Value $9.68
Cash per share $10.13
Debt to Equity 1.0
Price to Sales 1.1
ROA 6%
ROE 11%
IBES est: 2010 $1.57
2011 $2.11

I’ve run a quick DCF calculation to get a feel for the value of HWK in a sale: Using 2010 eps of $1.50 with a 3% growth rate and a discount rate of 5% the value could approach $40 per share. The problem with Hawk is that its eps are very volatile but there is the fact of having a great deal of cash on hand. To be continued………………

Regarding the economy: The ISM manufacturing composite index feel to 56.2 (a number above 50 is pretty good) indicating a slower rate of expansion. ISM characterized the current expansion as “solidly entrenched”. While many including myself expected a slowing of the expansion in the second half of the year, the rate of the deceleration has been surprising. While the herd is screaming “double dip recession” the data does not support the mob.

From morning commentary of MKM Partners Mike Darda:

“To recess or not to recess, that is the question. Either way, we believe the stock market has essentially discounted a double-dip scenario, with our NIPA-based model showing a gap between equity earnings yields and corporate bond rates that rivals anything seen in nearly six decades. Even using a 10-year moving average for earnings (which implies a 12.4% decline in corporate profits from current levels), the S&P 500 has fallen to valuation levels below those seen at the market lows in October 2002, October 1990 and December 1987.

We would be more concerned if the credit markets were in worse shape. Yes, corporate spreads have widened, but all of the action has been in (declining) Treasury rates; corporate bond yields have been flat, unlike the situation in 2007-08. Three-month dollar-LIBOR has been in a flat to down trajectory since late May. Two-year swap spreads at 37 basis points suggest that both the VIX and corporate spreads have overshot significantly to the upside (implying that equities are overshooting to the downside).

The catalyst for today’s slide appears to be the upward move in first-time jobless claims and the miss on the June ISM Manufacturing Index, although both were consistent with a continuing, albeit slower, expansion.”