KHD Humboldt Wedag: Earnings Good Now, But Future Profits May Suffer

KHD Humboldt Wedag Ltd. (KHD) has released its 3rd quarter results and at least through September 30 the company’s growth was still on track. Here are some of the figures as compared to the second quarter of 2008 and the 3rd quarter of 2007.

• Revenues: $193.6 million, +34%   , +29%
• Net income per share: $1.01, +60%, +58%
• Order backlog: $1.1 billion, -15%, +39%

For the first nine months earnings were 51% higher than the same period of 2007. The order backlog is concentrated in the emerging economies of Russia / Eastern Europe, Asia and the Middle East.

The financial crisis shows up in the new order intake of only $81 million, a decrease of 65% compared to the 3rd quarter of 2007. The company news release stated that many project awards are being delayed or canceled on fears of financial turmoil and questions on availability of financing. Management also noted they have been approached by some customers that are facing liquidity issues and want to renegotiate terms of their contracts.

The company acknowledges significant impact on its business if credit for its customers continues to be tight. It is assessing the impact on its current order bank and working to find solutions to maintain business and profitability in the future. One bright spot is that KHD is not reliant on borrowing for its own business and have cash on hand of over $400 million.

Now is a tough time for stock that projects future troubles. First, the market has driven share prices much lower on anticipation of bad news. Then on the actual report of bad news the stock gets hammered again. And in the case of KHD there is no real bad news yet, but future profits may suffer. The long term prospects for KHD remain bright, as the emerging markets where it sells its concrete and mineral processing equipment will need those products for its exploding infrastructure needs, but until credit markets return to a more normal state continued growth may be problematic.

Disclosure: KHD is a component of my site’s hypothetical Opportunities Portfolio. As a strong believer in KHD’s long term prospects I may be increasing the portfolio’s holdings if the stock falls significantly.

Comments

[ArtfulDodger:]

You might add that KHD is selling at well over $4.50 per share under its Enterprise Value, has only 47cents per share in debt, and $4.50 per share in free cash flow.

Off over $5.00 yesterday, surely such a fine company is a worthwhile buy.

Do investors think such companies are simply going to fall off into the abyss never to return?

Pinch me, will you?

2008 Nov 13 06:22 AM

[Tim Plaehn:]

This market has me clueless on what is seen as any kind of business value. KHD was undervalued at $25 per share, now under $10.

2008 Nov 13 09:30 AM

[Dan Weiss:]

The enterprise value is a bit more difficult to figure out as its predominantly non-dollar so the dollar strength has caused a decline in that value. Nevertheless, I agree its an undervalued stock.

2008 Nov 14 09:55 PM