frenchee
17 years ago
We've all heard of the parlor game, Six Degrees of Kevin Bacon. You can take the same principle of interconnections and apply it to trends. All trends have ripple effects, and sometimes the best opportunities are found not in the trend itself, but in industries several steps removed from, but related to, the trend.
Take the energy crunch that's affecting companies and economies around the world. This is an obvious trend, and you may fear oil and power companies are overvalued. So take it a step further. These industries need oil rigs and wind farms.
A step further? The need for hardware to build, run and maintain this complex equipment.
A market leader in the field of ball bearings for wind farms and oil rigs, Kaydon Corp. (KDN), stands to prosper. This one isn't going to knock your socks off in the short term, but it stands to benefit over the long term from ongoing demands for its products in the energy sector, as well as in the many other industries that use its products, from robotics to defense to medicine.
As I pointed out back in June, this company has been growing steadily over the past few years, and the second quarter of 2007 saw record sales. Margins suffered somewhat last year from KDN's expansion into Europe and Asia, but the company stands to benefit in the long term from this expansion, and from other efforts to cut costs and improve efficiency, including a plant relocation that is expected to be completed at the end of this year.
I also think this is a potential acquisition target because of its strong cash holdings and management, and especially because of its strong position as a supplier to the growing wind farming industry.
Type of Company: A manufacturer of a wide range of products used in a wide range of industries, with a solid history of growth, low debt, high cash reserves and a phenomenal management team.
Price Target: KDN has been up and down over the past few months, and is trading just where it was when I wrote it up in June, in the low $50s. I called for an $80 price target over the next eighteen months, and I still stand by that.
frenchee
17 years ago
Wind at Its Back
BY JIM MCTAGUE
IT TAKES MORE THAN WIND TO MAKE A WIND turbine go 'round. You also need a good set of ball bearings, and that's where Kaydon Corp. comes in. At a time when the rapidly growing wind-energy industry is beset by a parts shortage, Ann Arbor, Mich.-based Kaydon has the goods and is set to expand further in the field.
Kaydon (ticker: KDN), with a stock-market value of about $1.6 billion, supplies high-margin specialty parts like bearings and springs to sectors including defense, commercial aerospace, electronics and medical equipment. Its growth in wind energy is especially intriguing because some experts see that source providing more of America's energy by 2015 -- maybe not the 20% that the truest believers expect, but much more than the current 1%.
To make the most of that, Kaydon has just spent $60 million to expand its wind-turbine parts plant in Monterrey, Mexico. Sales of wind-turbine parts, mostly bearings, could zoom from $20 million now -- about 5% of Kaydon's total 2006 revenue of $404 million -- to $100 million by the end of the decade, says Ned Armstrong, an analyst with Friedman, Billings, Ramsey.
Such prospects help explain why investors have been bidding up Kaydon's shares. The stock, at a recent 55, is up more than 28% since Barron's mentioned the company's charms in a Feb. 19 story about rival bearing-maker Timken (TKR). But Kaydon's shares still are reasonably priced at 19 times 2007 expected earnings of $77 million, or $2.38 a share, after backing out the company's cash hoard of $375 million. Bulls see the stock headed as high as 66 in the next 12 months, and it could go considerably higher after that. Analysts are forecasting 2008 earnings of $2.75 a share.
As makers of wind turbines scramble for enough parts to keep pace with demand, Kaydon is doing a brisk business in ring bearings.
A new president and CEO, Jim O'Leary, is the source for much of the excitement surrounding the stock. The board hired O'Leary in March from Beazer Homes USA (BZH), where he was chief financial officer, to replace Brian Campbell, specifically because it wanted someone with a fresh perspective on capital allocation. (O'Leary says he's not a target of the FBI and SEC investigations into Beazer's mortgage-making activities in North Carolina.)
The new CEO is looking at possible acquisitions every day, he says. And with analysts projecting a growth in Kaydon's cash holdings of as much as 15% a year, he's also weighing enhanced dividends and stock repurchases.
Cash is just one of the balance sheet's strong points. Despite $200 million in long-term debt on its books, the company effectively has a debt-to-capital ratio of zero. That's because the debt is in the form of in-the-money convertible bonds, which will be turned into equity by May 30, 2008, explains Steve Barger, who follows Kaydon for Keybanc Capital Markets in Cleveland. Although that will increase shares outstanding from 28.29 million to about 35.2 million, Barger and other analysts already use the latter number when calculating per-share returns.
If O'Leary ultimately leverages up to a 30% debt-to-capital ratio, which would be a comfortable number for Wall Street, he could make profit-boosting acquisitions in the range of $600 million.
BARGER THEORIZES THAT O'LEARY will use some of his hefty war chest to buy a wind-power-related manufacturer in Europe to increase overseas business, which now represents about 30% of net sales. But O'Leary acknowledges that the weak dollar won't go far in purchases abroad, and he indicated to us that he'd rather expand his business overseas using existing sales offices. He also believes that the corporation's wind-energy divisions can grow largely on their own.
Wind energy is the most exciting of the company's markets. For one thing, many big European manufacturers now see a hot market in the U.S. and are likely to move manufacturing facilities here and start favoring local suppliers.
The Bottom Line
Kaydon's shares, up smartly this year, could climb another 155 to 20% in the next 12 months, powered by high-margin products in growth markets. The dividend may rise, too.O'Leary indicated that he will be courting Gamesa, the Spanish wind-turbine giant, which recently opened plants in Pennsylvania. Its components now come from Ameron International, in California, and several smaller U.S. companies. Ameron (ticker: AMN) has seen its shares rise from a low of $64 in March to the high 90s.
Kaydon does face risks. Wind energy could face a backlash from people who think the turbines' towers, sometimes 60 feet tall, disrupt landscapes. And orders for medical scanners, another application for bearings, may be crimped by reduced Medicare payments -- a result of federal budget-cutting -- says Gail Prochaska of IMV market research. Still, with high-margin products and a pile of cash, Kaydon is well-positioned for growth.
With any luck, the wind will stay at its back.
frenchee
17 years ago
RECOMMENDATION
We rate KAYDON CORP (KDN) a BUY. This is based on the convergence of positive investment measures,
which should help this stock outperform the majority of stocks that we rate. The company's strengths can be
seen in multiple areas, such as its impressive record of earnings per share growth, revenue growth, largely
solid financial position with reasonable debt levels by most measures, good cash flow from operations and
expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are
unlikely to have a significant impact on results.
HIGHLIGHTS
KAYDON CORP has improved earnings per share by 19.6% in the most recent quarter compared to the same
quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the
past two years. We feel that this trend should continue. During the past fiscal year, KAYDON CORP increased
its bottom line by earning $2.17 versus $1.52 in the prior year. This year, the market expects an improvement in
earnings ($2.40 versus $2.17).
Despite its growing revenue, the company underperformed as compared with the industry average of 18.2%.
Since the same quarter one year prior, revenues rose by 11.7%. This growth in revenue appears to have
trickled down to the company's bottom line, improving the earnings per share.
The current debt-to-equity ratio, 0.46, is low and is below the industry average, implying that there has been
successful management of debt levels. Along with this, the company maintains a quick ratio of 8.23, which
clearly demonstrates the ability to cover short-term cash needs.
Net operating cash flow has significantly increased by 155.39% to $34.51 million when compared to the same
quarter last year. The firm also exceeded the industry average cash flow growth rate of 126.14%.
45.00% is the gross profit margin for KAYDON CORP which we consider to be strong. Regardless of KDN's
high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of
the gross profit margin, KDN's net profit margin of 17.60% significantly outperformed against the industry.
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