UncleLongHair

KHD Humboldt Wedag: An Undervalued Winner

Thanks for the write-up. I am also long on KHD.

The two concerns that seem to spook people are 1) KHD is in a cyclical business near the peak of its cycle, and 2) plants are being overbuilt in regions that don't have the economy to support them and demand will hit a wall (really just a variation on #1).

I don't accept this at face valuek, though I can't completely dismiss it because growth rates of 50-100%+ are not sustainable for any significant duration. The cement supply business (i.e. Cemex) is indeed cyclical, though it has never seen growth rates like this. The cement *engineering* business (i.e. KHD) may be different, but we don't really have enough data to know.

Anyay I wonder if you can comment on this.

On the flip side, the company has been making noises about acquisitions for several quarters now. Last quarter they said they almost closed something but it fell through at the last minute. This quarter they said they have hired an "experienced professional" tasked specifically with finding a deal and have initially earmarked $100m in US Dollars for investment purposes. Note that not all of the cash on their balance sheet is available for deals, since it is offset by deferred revenue liabilities.

I also think that Michael Smith has assembled a great management team. When MFC Bancorp initially took over KHD, he assumed all the executive positions, but one by one handed them off to other people, and the team he has put together really impresses me.

If you want to read some very colorful history of Michael Smith, read about his background at Mercer International and his former business partner Jimmy Lee. Lee still runs Mercer and Smith has been making activist shareholder noises with letters to the board.