Estimating KSW at 40% Below Fair Valuation 10 comments
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On January 4th, we said that NASDAQ traded KSW Corp. (KSW) is an undervalued, small company with excellent fundamentals, probably owing its low P/E to the fact that it is widely unknown.
Indeed, trading volumes are astonishingly low, with often not more than a few thousand shares traded per day.
KSW, Inc furnishes and installs heating, ventilating and air conditioning [HVAC] systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects and also acts as trade manager on larger construction projects, such as the Mount Sinai Center for Science and Medicine where the Company is currently performing pre-construction services.
Not a single analyst is covering the company, notwithstanding the nice and steady growth over the past years.
Most recent earnings numbers show that KSW has felt little of the housing crisis, and although revenues have increased little in 2007, management has been able to increase net income by 32% last year (numbers from Yahoo!).
Also the quarterly numbers are growing nicely:
They seem to be poised to grow even more this year: the company announced recently that in March 2008, the backlog had increased to $134,000,000 from 110,000,000 at the end of 2006.
But lately, the general market has not been willing to appreciate the company’s quality. KSW’s share price dropped on ridiculously low trading volumes, together with the general market, and even reached an intraday low of $5.77 last Friday, in stark contrast to our estimated fair valuation of $9.72 .
When it’s too much, it’s too much. 40% below fair valuation is certainly too much.
Shortly before Friday's market close, Chairman and CEO Floyd Warkol announced that he “has completed all sales” under his stock sales plan filed with the SEC.
Warkol, who is the major individual shareholder of the company, said:
I consider our stock to be undervalued and have no intention to resume stock sales this year.
I strongly agree with him. It does not make sense to sell stock at these prices even if his stock options may be an important part of his compensation package.
More than ever, the stock has become a screaming buy for value investors.
Disclosure: Author has a long position in KSW
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This article has 10 comments:
The homebuilders told us for the better part of 2 years that everything in their businesses were just fine and we can all keep drinking the Kool Aid. I see little difference with this company and statements made.
The author also appears extremely biased being long the stock. His "estimated fair valuation of $9.72" is nothing more than that - an estimate, one which he has provided absolutely no insight how it was arrived at.
Until mid 2005, this was a $1 stock. A year later, when the CEO began his selling, it was then a $3.60 stock. That should be a clear indicator of what point the CEO thought the stock was fairly/overvalued. The growth in the company/stock appears to have merely tracked the housing/building boom since. Revenues for 2007 are flat with 2006, and the December quarterly sales number is down 15% from September - that would be the indicator to what happens in the next year or two to me. You bail out when cracks begin to apear, not when the company finally later confirms to you that things are not so rosy. The yearly income growth is attributable to nothing more than cost cutting. The "record backlog", as with the homebuilders, can have cancellations. Not a single analyst covers the company/stock because it is valued at under $40 million - who wastes his time on something so small?
The flat revenue figure for 2007 compared to 2006 is the key point here. The jump from 2005 to 2006 simply tracked the building spurt across the sector.
Now that the CEO stock sales are complete (the press release Friday to tell the world was amateurish) and he thinks the stock is now undervalued, you think he'll jump in tomorrow and begin buying? Don't count on it.
You don't seem to have read the previous article to which I referred, otherwise how can you say this? Of course I did not repeat the analysis that brought me to the estimated fair value of $9.72 because I could expect that you looked it up before accusing me to give no insight how I arrived there.
The article "The long case for KSW" was published on Jan. 4th (seekingalpha.com/artic...).
Fair value can never be anything else than an estimate because it always bases on assumptions. I have been very clear about my assumptions which were the P/E of comparable competitors and KSW's growth. Trane Inc. (TT) had a ttm P/E of 18.30, Johnson Controls Inc. (JCI) had 17.62 in January while KSW had a ttm P/E of 12.48 , which was 30% lower.
Today TT has 15.84 and JCI has 14.81 while KSW is at 10.03 which is again 35% lower than the average of his two bigger competitors (15.33).
Adding FIX (P/E 16.13) to the mix as proposed by another poster would bring the avg. ttm P/E to 15.6 which does not change much. So KSW is by any means valued at least 35% lower than his comparable competitors.
rsinj seems to argue that the lower valuation is justified because KSW is not growing sufficiently and he refers to the QoQ growth of the mrq.
So the 32% net income growth from 2006 to 2007 is nothing, just because last year's growth has been achieved by increased efficiency notwithstand a very small growth of revenues? I would rather say it is a sign of an able management to increase profits in a slowing economy.
Comparing single quarters does not give a correct idea of how things are going. In this business it is sufficient that a bigger work is finished a week earlier or later and it will be accounted in the previous or the next quarter and the QoQ comparison becomes worthless. To get a correct picture one needs to compare FY results over several years and I think it is very clear how good KSW fares if you look at these results.
Another argument of rsinj was that the growing backlog does not mean anything. While I agree that backlog is not necessarily equal to revenues, I predicted the stagnant 2007 revenues correctly from the backlog numbers and to me this seems to be a confirmation of their usefulness.
Am I biased about the fair value because I am long?
No, it's the other way round.
I am long because my analysis tells me how much this stock is undervalued and I don't need Mr. Warkol to tell me this.
That's why I am not selling at these prices even if KSW drops with the rest of the market.
Call it biased if you want.
TT had 34% less revenues and 47% less net income.
FIX had a 28% drop of revenues and 24% less net income.
JCI had 7.4% more revenue and 22% more net income.
KSW had stagnant revenues but 32% more net income than the year before.
None of the competitors has been as successful as KSW increasing the bottom line over the last FY.
Doesn't this mean it merits a higher P/E than the competitors rather than a 35% lower one?
From 2005 to 2006 revenues increased 40%, almost $25 million, yet the bottom line was flat. You ignore that fact, but are getting excited about increasing the bottom line less than $1 million on flat revenues?
TT and JCI are not "comparable" competitors as they are multi-billion dollar corporations - not a company that can disappear next year if the wind blows in the wrong direction.
Your numbers on FIX are also incorrect. Over the last FY, FIX had about 5% increase in revenues and about 13% increase in net income. They increased revenues every quarter of the year, and the only reason why earnings were down in the final quarter of 2007 was because they spent more on SG&A - most likely to acquire new business and continue increasing revenues going forward. FIX top and bottom line growth numbers are very impressive over the past few years (much more so than KSW's).
I wonder what the effect of decreasing SG&A to almost nothing in one quarter will be as we see KSW revenue numbers for the next couple quarters?
Regarding TT - clearly you have no idea what you are talking about and have done absolutely nothing other than reading top and bottom line numbers off the Yahoo income statement page. If you had done any real investigation you might have noticed the following link and the information regarding the spinoffs which took place - there wasn't a 34% drop in revenues as your 90 seconds of "research" indicates. In fact, revenues increased 14.2% in the final quarter, and 10.2% for the year.
biz.yahoo.com/prnews/0...
On Feb. 1, 2007, Trane, then known as American Standard Companies, announced plans to separate its three businesses. On July 31, 2007, the company completed the spinoff of its Vehicle Control Systems business as an independent company known as WABCO (NYSE: WBC - News). On Oct. 31, 2007, the company sold its Bath and Kitchen business to funds advised by Bain Capital Partners, LLC. On Nov. 28, 2007, the company changed its name to Trane to reflect its focus on its remaining business, Air Conditioning Systems and Services. On Dec. 17, 2007, the company announced that it had entered into an agreement to be acquired by Ingersoll-Rand Company Limited (NYSE: IR - News).
"Doesn't this mean it merits a higher P/E than the competitors rather than a 35% lower one?"
Since the information you added is completely wrong, as all of the "comparable" competitors have shown top and bottom line increases every year, in addition to the fact that the only way KSW showed this amazing 32% increase in net income was be eliminating SG&A for a quarter, I'd have to say the answer to your question is no - KSW does not warrant a higher P/E than these others.
Reality is:
- Reports fourth-quarter income per diluted share from continuing operations of 32 cents; 33 cents on an adjusted basis, up 27 percent
- Delivers 14.2 percent increase in fourth-quarter sales, up 10.2 percent for the year
Additionally:
- Net income growth of 14% for 2007
- Provides 2008 full-year outlook: sales up 5-6 percent, income from continuing operations up 18-26 percent, adjusted income from continuing operations up 21-28 percent
Another HUGE problem is that TT and JCI are manufacturers and KSW is a contractor. KSW installs what TT and JCI make. You need to compare KSW with other specialty construction contractors with similar revenues.