After deciding to post idea a day on the blog, I've failed to do so the very next one. Let's try for two ideas a week now:)
The stock of today - Kaydon (KDN ticker). I've heard Cramer touting it as a "wind power play", and decided to check it out. Knowing Cramer also said Trinity Industries is a wind play when the company has 70% of its sales tied to railroad industry, I was highly skeptical, but doesn't hurt to check it out.
Segments. 1) Velocity control products ($60M in sales, 28% EBITDA margin), shock absorbers
2) Sealing products ($46M), customized and standard rings and seals (20% margin)
3) Friction control - basically different bearings. For those who don't know, bearings are used to allow parts to rotate freely. So most rotating things have bearings in them. Kaydon manufactures bearings for big industrial applications - planes, marine, heavy equipment, wind turbines...
The actual bearing market is huge and in fragmented. SKF group (Sweden) has ~20% share, Timken has 10% share. Kaydon is tiny, however it is a leader within subsegments of the market like custom thin section bearings.
In terms of industry exposure, Kaydon has a good mix of products with 20% from Automation, 10% from power gen, 15% from military, 50% from other industrial sectors.
I actually like the company a lot because of its leadership position in its machine markets, expensive (presumably not super-easy to replicate) products that allowed the company historically to generate high margins.
Wind capacity currently stand at $100, projected to increase ~125M in 2009. Long-term outlook for that market is great, with around 15-20% growth. For every 1MW of wind power installed, one need a bearing worth ~$25K, so with 20GW capacity being added, the market is around $500M.
HOWEVER. The company is still 80% tied to U.S. industrial cycle. And what is happening to the industrial? Going down in flames. What's happening to the margins? Going down too. The valuation right now is simply too high at 14X EBIT to justify buying this at the top of the cycle. Maybe when the stock drop to ~30 I'll jump in.
Friday, May 30, 2008
Wednesday, May 28, 2008
Short Idea of the Day - ABB (ABBN ticker)
I'll attempt to devote 10-15 minutes each day to writing out at least one long/short idea. Probably the quality will not be great given the limited research time, but we'll see how it works out.
ABB is a good company that has gotten way ahead of itself in terms of growth and, more importantly, margins. The company generates 4B CHF in profits a year, and yet only has to spend 700M on Capex. I would believe that (maybe) if ABB was a far and away leader in its core markets, however it's not. In transmission and distribution it is the leading players, however it only has 15-20% share of the market. What's the implication? The products are probably not-so differentiated, and improved profitability is driven by capacity utilization rather than uniqueness. Hence in decreasing capacity utilization times (like recession) profitability will drop.
Quick look at the divisions.
Power Products. High and medium voltage products sold primary to utilities, but also a bit to commercial customers. $9.8B in revenues
Power Systems. Substantions, power converters, advanced cables and systems for power plant control. Division generated $5.8B in revenues in 2007
Automation Products. Switchgears, breakers, switches, generators, wiring, power electronics systems, mostly for industrial clients. $8.6B in revenues.
Process Automation. Process control systems. These can be devices that record/display the temperature or more complex-looking machines with multiple data display functionality. $6.4B
Robotics. The coolest sounding and also the smallest, only $1.4B
Valuation. I think just normalizing the margins to 6-7% (2B EBIT), then applying 10-11x multiple, gives you the intrinsic value of less than half current price. I think in 2009 this baby will start dropping like its hot.
ABB is a good company that has gotten way ahead of itself in terms of growth and, more importantly, margins. The company generates 4B CHF in profits a year, and yet only has to spend 700M on Capex. I would believe that (maybe) if ABB was a far and away leader in its core markets, however it's not. In transmission and distribution it is the leading players, however it only has 15-20% share of the market. What's the implication? The products are probably not-so differentiated, and improved profitability is driven by capacity utilization rather than uniqueness. Hence in decreasing capacity utilization times (like recession) profitability will drop.
Quick look at the divisions.
Power Products. High and medium voltage products sold primary to utilities, but also a bit to commercial customers. $9.8B in revenues
Power Systems. Substantions, power converters, advanced cables and systems for power plant control. Division generated $5.8B in revenues in 2007
Automation Products. Switchgears, breakers, switches, generators, wiring, power electronics systems, mostly for industrial clients. $8.6B in revenues.
Process Automation. Process control systems. These can be devices that record/display the temperature or more complex-looking machines with multiple data display functionality. $6.4B
Robotics. The coolest sounding and also the smallest, only $1.4B
Valuation. I think just normalizing the margins to 6-7% (2B EBIT), then applying 10-11x multiple, gives you the intrinsic value of less than half current price. I think in 2009 this baby will start dropping like its hot.
Tuesday, May 27, 2008
General Cable - Time to Sell
General Cable, as the name subtly suggest, manufactures cable. Cable for what? All sorts of industries really, key segments being electric utilities, industrial, construction and communication.
The company has been able to grow its revenue tremendously from from $2.8B to $5.0B (with a lot of the growth driven by raw material price increases), but, more importantly, has grown EBITDA margins from 2.9% to 8.8%. The outcome is a stratospheric price performance of the stock which went from $4 in 2002 to $70 recently. The general sentiment surrounding the stock is very bullish. It's labeled as a 'global infrastructure play', and is trading at a healthy 11x EBITDA multiple. Let's see whether this is warranted or not.
Business Description. Co
- Electric Utilities constitute 35% of sales
- Infrastructure (aka varied industrial projects) constitutes 25% of sales
- Construction (25% of sales)
- Communications (14%) of sales
Industry Overview. Global cable industry is $160B market, that historically has grown at GDP like rates. The largest players are
Bull Case. U.S. and Europe have old power transmission and distribution infrastructure that has been primarily built in 70s, hence is in dire need of repair. As a result, spend on T&D is climbing, with Edison Institute projecting increases from $8B in 2007 to $11B in 2007. Similar trend should play out in Europe, and General Cable should be a beneficiary of this. Additionally, company participates in fast-growing segments like umbilical cables (nice name, I know), which are used to transport power/liquids to offshore oil&gas location. Offshore production is projecting to grow strongly, and General Cable, again, benefits. Company also has exposure to incredibly fast-growing Asian markets.
Bear Case. Confessing right away, this is the side I'm on. And honestly I was on it right after looking at the company long-term financials. The margins and returns on capital look simply too good to be true for this ultra-competitive industry where vast majority of products are barely differentiated. (Note: vast majority, not all. Company may tout it's acquisitions all it wants and it's a very good strategy, but the truth remains that these high-tech products are a fraction of the revenues). The industry has benefited from high utilization rates that have propelled the pricing upwards, thus benefitting the margins. Where does company derive most of its revenue from? North American and European general industrial and construction markets. And in recession general industrial activity drops off, driving down utilization and sending margins off the cliff. The latest manufacturing data for April shows the first significant decrease in utilization, but that's only the beginning. I expect EBIT margins on all non-energy infrastructure segments to fall down to 2-3% by end of 2009, while the energy infrastructure will continue to do OK, growing at 4-5% with flattish margins. As a result look for EBITDA to decline by at least 50%, and the stock by even more than that.
The company has been able to grow its revenue tremendously from from $2.8B to $5.0B (with a lot of the growth driven by raw material price increases), but, more importantly, has grown EBITDA margins from 2.9% to 8.8%. The outcome is a stratospheric price performance of the stock which went from $4 in 2002 to $70 recently. The general sentiment surrounding the stock is very bullish. It's labeled as a 'global infrastructure play', and is trading at a healthy 11x EBITDA multiple. Let's see whether this is warranted or not.
Business Description. Co
- Electric Utilities constitute 35% of sales
- Infrastructure (aka varied industrial projects) constitutes 25% of sales
- Construction (25% of sales)
- Communications (14%) of sales
Industry Overview. Global cable industry is $160B market, that historically has grown at GDP like rates. The largest players are
Bull Case. U.S. and Europe have old power transmission and distribution infrastructure that has been primarily built in 70s, hence is in dire need of repair. As a result, spend on T&D is climbing, with Edison Institute projecting increases from $8B in 2007 to $11B in 2007. Similar trend should play out in Europe, and General Cable should be a beneficiary of this. Additionally, company participates in fast-growing segments like umbilical cables (nice name, I know), which are used to transport power/liquids to offshore oil&gas location. Offshore production is projecting to grow strongly, and General Cable, again, benefits. Company also has exposure to incredibly fast-growing Asian markets.
Bear Case. Confessing right away, this is the side I'm on. And honestly I was on it right after looking at the company long-term financials. The margins and returns on capital look simply too good to be true for this ultra-competitive industry where vast majority of products are barely differentiated. (Note: vast majority, not all. Company may tout it's acquisitions all it wants and it's a very good strategy, but the truth remains that these high-tech products are a fraction of the revenues). The industry has benefited from high utilization rates that have propelled the pricing upwards, thus benefitting the margins. Where does company derive most of its revenue from? North American and European general industrial and construction markets. And in recession general industrial activity drops off, driving down utilization and sending margins off the cliff. The latest manufacturing data for April shows the first significant decrease in utilization, but that's only the beginning. I expect EBIT margins on all non-energy infrastructure segments to fall down to 2-3% by end of 2009, while the energy infrastructure will continue to do OK, growing at 4-5% with flattish margins. As a result look for EBITDA to decline by at least 50%, and the stock by even more than that.
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