Kraton Performance Polymers, Inc. (NYSE:KRA) has taken a beating over the past week, but as an old sage once said, “Buy when people are fearful and sell when people are greedy.” Kraton appears to be fit the value investor’s bill for buy low, although with the current market sentiment, I can’t guarantee it won’t go lower. So, with that in mind, let us take a look at Kraton.
The company provides a pretty unique service. It, for simple terms, produces a rubber substitute called Styrenic Block Copolymers or SBCs. These SBCs are used in a lot of everyday items notably: disposable diapers, toothbrush and razorblade handles, power-tools, and in asphalt formulations. The company also dabbles in a latex substitute that is used most notably in surgical gloves.
So, while these guys may not be on the bleeding edge of innovation they do have a strong grip on their business and they are increasing their bottom line. They just announced their Q2 results marking three consecutive quarters without missing the mark. This is typically regarded as a good sign for a few reasons, but what I believe to be the most important is that the company’s revenue is predictable. Value investors always want to buy a company that they can understand and this is one of them, at least from an institutional point of view.
Now I am not the only one cheering for these guys UBS on Thursday August 4th lowered their target price on Kraton down from $55 to $34. Note that UBS lowered the price target after the stock had fallen. So, obviously there is at least one big player in the wing who is willing to bet on Kraton, and I think there are many more, particularly opportunistic investors looking to add a position to their portfolio in this buyers market.
Fundamentally speaking, the company is great. It currently trades at a multiple of 1.5 to its book value of 15.63 (tangible book value), so watch for the stock to drop a little lower, but do keep in mind the price target is $34 which is roughly a 50% return on your investment.
Furthermore, the company’s price to sales ratio is hovering around 1 on revenues of $42.33 per share. The management is also doing very well at the company generating 9% return on assets 22% return on equity and 11% return on investments.
I understand that investing in this market is like biting a bullet, but you can rest easy knowing that Kraton has strong finance ratios: Current ratio is at 4.03, Quick ratio is at 1.64, and Total Debt to Equity is 0.71.
Personally I am not buying yet, but I am watching closely, and if the stock dips closer to $15, I may take a position; this is just currently an idea in a market that is wide open for possibilities. Once the market corrects this stock is poised to hit at least $30 based on fundamentals alone.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.