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KSW (KSW) was one of my most profitable holdings last year, but I have been out of the stock since January. However, I have continued to believe that the company has positive prospects, and on the heels of yesterday’s earnings announcement, I believe the company has become too cheap to ignore. Therefore, I have purchased a moderate position at $7.35.

KSW’s first quarter earnings were released yesterday, and on first look, they appear to show continued steady growth. Although the first quarter is seasonally the slowest quarter, KSW still managed a 14 percent improvement in revenues. More importantly, net margins increased year over year from 2% to 5%, and should continue to increase as revenue increases. What is most impressive about the results is the fact that KSW has managed to continue to replace its backlog, which currently stands at $108 million or slightly more than 4 quarters worth of revenue. That is some serious earnings visibility.

Based on KSW’s results, the shares are now trading at just 13 times the trailing four quarters earnings. However, this valuation is a bit misleading, because the company has $15 million in cash on a $42 million dollar market cap. KSW’s huge cash position gives them a lot of options to either return money to shareholders or make acquisitions, and it should put a stable floor under the stock.

Finally, KSW’s stock has been held down over the last quarter by the barrage of insider sales from the CEO. This is nothing new for the stock, as the CEO had been approved to sell 200k shares as of last year’s annual report. According to my previous posting, the CEO still had about 125k shares left to sell as of January, and he made good progress this quarter by selling some 55k shares. In such a thinly traded issue, this had the effect of depressing the stock price, but I believe that the selling pressure should let up soon as the CEO is getting nearer to the end of his authorized share sales. This should lift the cap that has been on the stock for the last few months, and KSW has plenty of room to run from a valuation standpoint. Therefore, I expect that KSW should move quietly higher going forward, and given the company’s great balance sheet and steady growth, it could easily support a multiple of 18-20 times the trailing 4 quarters’ earnings.

I’ll be doing a more detailed review of the stock once we get a 10Q, but as far as I can tell right now, everything looks set up for the stock to drift higher.

Disclosure: Author has a position in KSW

KSW 1-yr chart

KSW

Source: KSW: Dirt Cheap and Drifting Higher