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  • HWKN And KMG: Specialty Chemical Stocks To Own Now 0 comments
    Sep 3, 2014 10:49 AM | about stocks: HWKN, KMG

    (click to enlarge)The outlook for industrial stocks is rapidly improving with the U.S. economy continuing to emerge from the woods. This may be a good opportunity to go long in undervalued plays such as Hawkins Inc. (NASDAQ: HWKN) and KMG Chemicals Inc. (NYSE: KMG), which are also preferred for their solid profit margins by virtue of being specialized players.

    Minnesota based Hawkins Inc. distributes bulk chemicals, blends, and manufactures and distributes specialty chemicals to a variety of industries. This is a fairly mature market and revenue growth is difficult to come by, but the management has done a commendable job of increasing shareholders' returns over the last couple of years. In line with this approach, Hawkins has recently announced a plan to repurchase 300,000 shares.

    While the company's top line growth was moderate at 3.5 percent, its profits grew at a faster rate of 17.8 percent in the latest quarter. This was partly aided by effective control in selling, general and administrative expenses, while a debt free balance sheet also helped the matter. Unfortunately, the stock is not covered regularly by brokerage houses, but it is no rocket science to see that a price earnings ratio of 20.6 is not on the higher side and leaves ample space for further growth. Prospective investors may also find the stock attractive given the small 2 percent annualized dividend yield, and the 5.2 percent net profit margin.

    KMG Chemicals is another undervalued industrial play in the specialty chemicals sector. The company manufactures and distributes electronic chemicals and industrial wood treating chemicals to semiconductor players and industrial customers respectively. Aided by the acquisition of Ultra Pure Chemicals business in May 2013, the company posted a 40.9 percent jump in third quarter top line, while adjusted EBITDA grew to $7.6 million, up from $6.3 million in the same period last year. The relatively slow growth in profits was due to integration costs and indicates full benefits of the restructuring exercise are yet to kick in.

    Meanwhile, the company is continuing with its plan of cost rationalization and has shifted production from its Fremont, California plant to other manufacturing facilities. Starting fiscal 2015, the company expects to generate annual operating savings of at least $6 million. This will be a big boost to the company's financial performance, and the stock, which currently trades at a forward price earnings ratio of 18.6. Given the positives, it is no wonder that analysts at Gabelli & Co recently upgraded the stock to "Buy".

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: HWKN, KMG
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