Kaydon: Profits Behind the Scenes

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Debra Fiakas

Most investors when they consider the alternative energy sector think about the big solar photovoltaic manufacturers or the ethanol producers.  Engineering firms like Kaydon Corporation (KDN:  NYSE) rarely come to mind.  With special expertise in fluid processes, Kaydon is an indispensable partner in a variety of alternative energy projects such as wind, renewable diesel and ethanol plants.

The company earned a 12% net profit margin on $4645 million in total sales in the year 2010.  As impressive as that might be the really bright spot in Kaydon’s financial picture is its ability to generate cash  –  $93.9 million in 2010.  This implies a cash conversion rate of 20.2%.

Kaydon is not a high profile company with flashy investor relations outreach.  Its corporate web site is static and is directed primarily toward customers who might happen by looking for custom bearings or rings and seals.  Perhaps this customer-centric orientation is why Kaydon is growing in a field that is challenging for others.

The company just announced a key acquisition in German adding springs and dampers to the product line.  Kaydon is buying HAHN-Gasfedern GmbH for an undisclosed sum.  HAHN-Gasfedern is doing approximately $20 million in annual sales and is reportedly profitable.  The new product line should be interesting to customers all across Kaydon’s base in the energy, renewable energy, pharmaceutical and other process manufacturing industries.

The stock is selling at 23.5 times trailing earnings and 20.8 times forward earnings, suggesting analysts following the company see earnings growth ahead.  The consensus rating at this time is hold.  However, we believe investors should consider company’s like Kaydon that have been consistently delivering profits for a play on the alternative energy industry.  KDN also offers a 2.0% dividend yield at the current price level, suggesting that even at even with a forward earnings multiple near its growth rate, the stock offers value.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  KDN is included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.


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