We came across a bearish thesis on Hawkins, Inc. (HWKN) on Deep Fundamental Research’s Substack by Patrick Zhou. In this article, we will summarize the bears’ thesis on HWKN. Hawkins, Inc. (HWKN)’s share was trading at $130.03 as of Nov 22nd. HWKN’s trailing and forward P/E were 33.26 and 34.72 respectively according to Yahoo Finance.
A technician in a deep-water treatment facility, ensuring clean water for public safety.
Hawkins, a U.S.-based chemical distributor, operates across three key segments: chemical distribution, water treatment, and health and nutrition ingredient distribution. Despite having a solid business Hawkins’ current valuation appears stretched, with a cautious outlook for the medium term. The company’s solid financial performance in fiscal year 2024, driven by favorable cyclical trends, is unlikely to be sustained, and a discounted cash flow (DCF) analysis suggests a 25–30% downside, with a target price of $97. Hawkins’ chemical distribution segment, which accounts for 45% of revenue, resells commoditized and specialty chemicals to various industries like electronics, energy, and food and beverage. While this segment benefits from Hawkins’ regional presence and strong supplier relationships, it is highly fragmented and lacks differentiation, limiting its ability to generate excess returns. However, its integration with the water treatment segment adds strategic value.
The water treatment business, representing 40% of revenue, is Hawkins’ primary growth driver. The company offers a unique end-to-end solution, combining chemical distribution, water treatment consulting, and operational support, which allows it to serve municipalities and industrial plants effectively. This positioning in a low-competition market has enabled Hawkins to carve out a competitive niche. Recent acquisitions in the southern U.S. further expand its market presence, offering additional growth opportunities. With higher profit margins than the chemical distribution segment, water treatment continues to drive the company’s long-term growth potential. The health and nutrition ingredients segment, while smaller, adds diversification to Hawkins’ portfolio, benefiting from the company’s established distribution capabilities.
Hawkins demonstrates a disciplined capital allocation strategy, reinvesting approximately 45% of its free cash flow into acquisitions, particularly in the water treatment segment, while returning 25% to shareholders. The company has shown operational excellence, maintaining stable working capital metrics and leveraging its regional focus for reliable supply chains and high customer retention. Despite these strengths, the company faces challenges ahead. The favorable cyclical trends in 2023, including falling raw material prices, are unlikely to persist, and the company’s elevated valuation, with a forward P/E exceeding 30x, looks unsustainable given its growth profile. While Hawkins’ water treatment business offers long-term growth prospects, its valuation leaves little room for error, making the stock appear overvalued. Investors should be wary of the current price and consider waiting for a more favorable entry point.
Hawkins, Inc. (HWKN) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 15 hedge fund portfolios held HWKN at the end of the third quarter which was 14 in the previous quarter. While we acknowledge the risk and potential of HWKN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HWKN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.