Kadant Company: Former Spin-Off Does Good
Back in 2000, a predecessor of Thermo Fisher Scientific (NYSE:TMO) spun off its 91%-owned subsidiary, Kadant (NYSE:KAI), to existing shareholders. Each share of the parent was worth 0.0612 shares of the newly independent company providing equipment and systems for pulp and paper and other process industries. It hasn't always been rosy at the Massachusetts manufacturer, but it is now.
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Past and Present
As I mentioned in the opening paragraph, it hasn't always been a bed of roses for Kadant. By the time it finished its first year as an independent company in 2001, its revenues were $219 million with income from continuing operations of $12.5 million. The next year revenues dropped to $177 million and it wasn't until 2005 that revenues recovered and were higher than in 2001. Furthermore, despite revenues in 2005 of $243.7 million, its income from continuing operations was $9.9 million, $2.6 million less than four years earlier. Business got better in 2006 and 2007, to the point that revenues hit $366.5 million with $37.0 million in operating income. Unfortunately, the good times wouldn't last. By the end of 2009, revenues were back where they were in 2001 and it was losing money as paper manufacturers deferred maintenance and capital spending. Thankfully, its customers turned the taps back on in 2010 and profits came flooding back. In 2011, Kadant simply carried on where 2010 left off. Most importantly, profits are reaching an all-time high. (To know more about income statements, read Understanding The Income Statement.)
Management expects revenues of at least $92 million with diluted earnings per share of 56 cents. For all of 2011, revenues should be at least $330 million with diluted earnings per share of $2.42. On a non-GAAP basis, earnings per share will be at between $2.09 and $2.11, reflecting the exclusion of a gain on the sale of assets. On approximately $36 million less revenue than in 2007, its best year to date, it will generate around $25.6 million in net income, $3 million higher than in 2007. Margins are higher, backlogs are at record levels and bookings are strong. Kadant ended the third quarter with net cash of $30.7 million, its highest level of third quarter net cash in some time. Impressive is the fact its debt/EBITDA ratio was 0.36 in the third quarter, substantially lower than its ratio of 2.31 in 2009. Cash flow is extremely solid these days.
Why Buy Its Stock
At this moment in time, its enterprise value is 6.6 times EBITDA, lower than Metso (OTCBB:MXCYY) at 7.1 times, Cenveo (NYSE:CVO) at 7.1 times and Global Power Equipment Group (Nasdaq:GLPW) at 7.6 times. While I wouldn't classify its stock as dirt cheap, it's definitely cheaper than it was in 2007, when it traded above $30. Although it hasn't done nearly as well as its former parent since the spinoff (up 89% on a cumulative basis versus 208% for Thermo Scientific), it's experienced better returns than the S&P 500 at 14%. Something tells me the gap between the two companies is soon going to narrow.
The Bottom Line
In the third quarter, Kadant repurchased 429,715 of its shares in August for an average price of $21.98 per share. Its average share price during the month of August, based on a high and low for the month, was $22.64 a share. Management managed to buy its shares at a reasonable price. That hardly ever happens. Furthermore, if you look at those share repurchases from the nine-month perspective (it bought none in the first two quarters), it actually bought them for 37% less than its 2011 high. That too is a rarity. This as much as anything is a sign that management understands how to allocate capital. That's critical in any business, but especially so in smaller companies. While Kadant's had some difficult times, now is not one of them. Buy away. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)