Kaydon - Good Company, Bad Time

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.