KEMET Corporation: A Strong Value Play

| About: Kemet Corporation (KEM)

Do your own research prior to making any investment decisions. I and/or my family/friends own the stock mentioned in this article.

KEMET Corporation (NYSE:KEM) manufactures and sells solid tantalum and multilayer ceramic capacitors (stuff used in electronics). These products are used in communication systems, data processors, PCs, and for military/aerospace purposes.

KEM is trading at a price of $2.70 with a market capitalization of ~$219m (as of 7:30am 9/1/10). As you could see from a chart it has enjoyed one hell of a run from its approximate bottom of $0.08/share in March 2009 to its current price of $2.70. UNFORTUNATELY I can't say I've been along for that ride. However the name still presents, in my opinion, immense value at this level.

I see there being two strong supporting reasons for owning this name. The first is based on straight valuation. KEM's trading at $219m market cap against a book value of ~$254m. This represents a nearly 16% discount. The firm also enjoys strong liquidity with a quick ratio of 1.6 and debt-to-assets of only 37%. In this environment having liquidity and debt control at these levels is a huge advantage.

The second reason to own the name is for the earnings potential. Trailing twelve months EBITDA was ~$101m which puts KEM trading at less than 2.5x TTM EBITDA. The quarterly EBITDA has been increasing steadily over those four quarters from $9.16m to $22.2m to $25.4m to the most recent quarter's $45.2m. Capex remains manageable but growing from ~$2m four quarters ago to ~$7m in the MRQ. Gross revenue in the MRQ was 24.9% which was a large increase over the prior quarter's 20.2%. Operating income has been steadily rising on a quarter-over-quarter basis as well (-$1.57m, $8.45m, $11.96m, and the MRQ of $30.66m). The most recent quarter experienced a non-operating loss of $42m, which, when excluded, allowed KEM to actually earn $20m on the quarter.

Factoring in the valuation, the recent price reaction, the lack of institutional support (for now), and the quarter-over-quarter continuing improvements I don't see how one would not view this is a great value play.

BWS Financial has also released a report putting an $8 12-month price target.

Disclosure: I and/or my family/friends own shares