Kaman Corporation Offers More Than Just An Industrial Comeback

Sep. 6.13 | About: Kaman Corporation (KAMN)

Until now, investor interest in industrial stocks like Kaman Corporation (KAMN) was limited to the industrial sector comeback related to the broader economy but as the market consolidates, it's time to look for catalyst driven names that are ready for the next leg of growth.

Kaman Corporation is one such name, which is uniquely positioned to gain from the following

  1. Expansion of platforms in the Department of Defense
  2. More dollars worth of content in newer model of commercial planes.
  3. Further roll out of commercial planes having Kaman equipment
  4. Margin improvement from operational efficiencies.
  5. Upward revision of revenue and earnings estimates.

Stocks downside is limited by the fundamental value of the business, which offers a base case scenario of $27 for the stock, as larger industrial companies get more acquisitive as shown by the Kaydon Corporation (KDN) acquisition.

Brief about Kaman

Kaman Corporation is a Connecticut based company focused on industrial markets. The company has a market cap of $970 million and business is divided between 2 divisions.

  1. Aerospace (35-40% of revenue): manufacturer and subcontractor of aircraft equipment. It serves both commercial and military end markets in all geographies.
  2. Distribution (60-65% of revenue): The company is 3rd largest transmission/ motion control industrial distributor in North America.

Recent growth drivers

For the last few years, the company has seen strong growth compared to industry peers. Revenue growth for last 3-4 years has been ranging from 8-15%, primarily because of,

  1. Sales of bearing product lines in the commercial and regional / business jet markets.
  2. Increased sales volume of the JPF (Joint Programmable Fuze).
  3. Aerospace segment benefiting from commercial sales to foreign militaries of the JPF.

Growth Drivers going forward

Revenue backlogs offer an early read into the upcoming growth opportunities for the company and they have gone up by 20%, from $532 million at the start of the year to $646 million in the most recent quarter. Some of the other important opportunities going forward are as follows,

Opportunities for the aerospace division

Next generation commercial aircraft offer one of the most promising opportunities for Kaman, where the company is expected to see growth from both, units as well as content per plane going up. As the worksheet shows, in some models, content per plane has tripled.

2012

2016

Growth

KAMN Rev. Potential per plane

Boeing 787

40

120

200%

$100,000

Airbus A350

0

25

$300,000

Click to enlarge

Some of the upcoming businesses, for which company is uniquely positioned to win and which can offer decent long-term revenue growth potential for the company are,

  1. Airbus A350 airframe bearings
  2. Updated cabin for AH - 1Z helicopters by the Bell corporation
  3. Composite door for Learjet 85 aircraft
  4. Winglet for G280 aircraft

Unmanned K-Max helicopter that company has developed with Lockheed Martin (LMT) has been in test trials since 2011 and platform has potential to go for major expansion soon.

The ramp up of defense build outs in the U.S. and international markets

Some of the prominent opportunities that the company can benefit from, being

-Joint Programmable Fuze (JPF) is a bomb fuse for US Air Force. Current inventory levels are less than 50% of the required level and the company is expected to see growth as the USAF replenishes its inventory level. Last month, the company received a renewed contract worth $70 million for the sale of JPF.

  1. Recently, the company signed a $121 million contract with Australia to resell SH - 2G (NYSE:I) aircraft package. The Company will share proceeds from the resale with the Australian government. Only $20 million of revenue is to be booked in 2013.\
  2. he company manufactures cabins for AH-1Z attack helicopter, which is produced by Bell Helicopter. This cabin update was last done in 1995. The value of this program might exceed $200 million from a backlog of $33 million currently. The first cabin delivery is expected in the third quarter of 2013.
  3. Continue strength of the Sikorsky Black Hawk helicopter cockpit program

The Sequester-related investor concern is unwarranted: Since, most of the products offered by the company are sole-sourced products, total exposure to Sequester-related cutbacks are less than 2% of the total revenue for the company.

Distribution division potential

Distribution can offer both, revenue growth from acquisitions and earnings growth from operational efficiencies. The company has made 4 acquisitions in the last 2 quarters and 13 in last 42 months to expand its distribution business.

Part of the acquisition related operational efficiencies have improved the operating margins from 2% to 5% in the last quarter. Some of the following changes are expected to take this momentum forward,

  1. Common ERP platform from eight currently.
  2. Using an existing sales team to expand acquired products
  3. New higher margin product lines like electrical control products.

"IF" scenario analysis of earnings growth potential

Margin improvement: Consolidated operating margins for the company have room to expand to almost 10% range by 2014, as

  1. Aerospace division operating margins move from 16% to 19% level on the back of higher margins new platform launches.
  2. Distribution division operating margins move from 5% to 7%. Margins have already improved from 2% to 5% in the last quarter.

Revenue growth: Looking at the opportunities, it will be a good estimate to expect 10-15% revenue growth rate on the back of,

  1. Organic growth rate of 5-7%
  2. Acquisitions adding 4-6%
  3. New businesses adding 2-3%

EPS Estimates IF

Rev growth 2014

Operating Margins

10%

15%

20%

7%

$2.9

$3.1

$3.2

9%

$3.9

$4.1

$4.2

10%

$4.3

$4.5

$4.8

Click to enlarge

Current Street estimates are for EPS of $2.70/share, which is very conservative and maybe moving higher.

Acquisition value can offer floor for the stock

If we run a "scenario analysis" looking at the valuation metrics of the acquisitions done recently, including the Kaydon Corporation yesterday, the stock has limited downside from its current trading range of $35-40/share.

Stock Price IF

Multiples

2013

2014

7X

$27

$36

10X

$38

$52

13X

$50

$67

15X

$58

$78

EBITDA

$103,518

$140,133

Click to enlarge

As per the worksheet, bottom case might be a $27/ share and highest possible can be as high as $78/ share. Risk/ reward looks very favorable in any acquisitive event.

Conclusion

Besides the industrial comeback story, there is a potential of earnings expansion from, both, revenue growth and operating margin expansion. Estimates are low and inherent value of the franchise is high, both might see an upward revision soon. Target is $50.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.