Kraton Polymers: High Earnings Growth Not Priced In

Jul. 6.12 | About: Kraton Performance (KRA)

Possibly one of the cheapest stocks in the basic materials sector today is Kraton Performance Polymers (KRA), original inventor of the styrene block copolymer. The company has seen strong earnings growth over the last 5 years and is expected to see even higher EPS growth over the next 5 years, and price multiples indicate that KRA is trading at a steep discount.

Kraton produces engineered polymers used "in a wide variety of applications including consumer and personal care items, adhesives and coatings, electronics, medical supplies, automotive components, and paving and roofing materials," according to the company website. Kraton invented the styrene block copolymer in the 1960s, and now has over 800 customers internationally. Its stock has a market cap at $731.85M, with most recent closing price at $22.70.

The company's sales trends have been very strong, not only in absolute terms, but also compared to Kraton's inventory and accounts receivable: Revenue grew by 18.41% during the most recent quarter ($408.31M vs. $344.83M y/y). Accounts receivable grew by 4.96% during the same time period ($186.57M vs. $177.76M y/y). Receivables, as a percentage of current assets, decreased from 28.01% to 22.77% during the most recent quarter (comparing 3 months ending 2012-03-31 to 3 months ending 2011-03-31).

Inventory fell by 2.17% during the same time period ($365.97M vs. $374.09M y/y). Inventory, as a percentage of current assets, decreased from 58.95% to 44.66% during the most recent quarter (comparing 3 months ending 2012-03-31 to 3 months ending 2011-03-31).

Kraton's 5-year projected EPS growth is at 18.33%, and projected EPS growth over the next year is at 26%. EPS has grown almost 14% over the last 5 years. The stock is currently rallying above its 20-day, 50-day, and 200-day moving averages.

Despite the stock's recently strong performance, the stock appears cheap by many measures. PEG is at 0.47. P/FCF is at 6.85. TTM P/E is at 8.7 vs. 14.15 industry average. TTM P/S is at 0.49 vs. 1.86 for the industry average.

All in all, Kraton Polymers has seen very encouraging trends in sales, inventory, and earnings. I believe the stock's price multiples indicate that KRA may have more value than the market is currently pricing in.

For a closer look at KRA stock, try Kapitall tools!

For an interactive version of this chart, click on the image below. Analyst rating data sourced from Zacks Investment Research.

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*Written by Alexander Crawford. Price multiple data sourced from Fidelity, EPS data sourced from Yahoo! Finance, accounting data sourced from Google Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.