Friday, October 18, 2013

The Road to Kaydon

Most investors with an interest in the alternative energy industry think first of the energy source  -  solar, wind, geothermal or biofuel.  There are other roads to access the returns promised by the shift from fossil fuel to alternative sources.  But do not waste time as these gems are in the sights of strategic buyers as well.

Kaydon Corporation (KDN:  NYSE) produces components and sub-systems used in the alternative energy industry.  Its friction control products are critical for the efficient operation of wind turbines and blades.  These products include large diameter turntable bearings and specialty balls.  The company also makes fuel cleansing systems and air filtration systems.  The company reported $55.4 million in sales to customers in the wind energy sector in 2012, in-line with 2011 sales of $54.3 million but well off the sales levels in the previous years  -  $103.0 million in 2009 and $95.9 million in 2010.  Despite the drop in sales to the wind energy sector, it still represented a solid 12% of total sales. 

The friction control segment represents over half of Kaydon’s total sales, which were $462.4 million in the most recently reported twelve months.  Kaydon has been consistently profitable over the years, but took a non-cash charge of $46.3 million in 2012 to write-down the value of its wind energy production equipment.  The impairment charge was triggered by a restructuring of the company’s wind energy business line.  The restructure was needed to bring the business in line with the reduced pace of growth in the wind segment.

The impairment charge in third quarter 2012 resulted in a deep loss for the quarter.  While the price/earnings multiple for KDN is negative, operating cash flow is another story.  In the most recently reported twelve months Kaydon turned 24% of sales into cash.  Indeed, Kaydon distributed $367.9 million in dividends in 2012.   The stock had been trading below ten times trailing cash flow from operations.  If you did not see this as a bargain you are now too late.  The strong cash flows were probably one of the attractive elements that brought SKF Group of Sweden to make a $35.50 cash tender offer for Kaydon shares that closed October 16th.

SKF Group is a worldwide supplier of bearings that has built a network of over 15,000 distribution centers for its bearing products as well as maintenance and engineering services.  Tucked  into SKF, Kaydon will probably lose its alternative energy character.  Just the same, the suppliers behind the scenes remain a smart way to play the transforming energy sector.

 
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.

 

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