Dynamic Materials: Explosive Growth

| About: DMC Global (BOOM)
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Boulder, Colo.-based Dynamic Materials Corp. (Nasdaq: BOOM) is a leader in the explosion-welded clad metals market (a segment specializing in using an explosive process to fuse non-compatible metals—which cannot be welded by conventional processes—creating bonds that are stronger than the metals themselves). Dynamic Materials has made shrewd moves in the past few years, including key acquisitions in the United States and Europe. Today, the company controls as much as 40% of worldwide market share (predominantly in North America and Europe), though it still faces competition in Asia from Japanese player Ashai Kasei Corp. (OTC: AHKSY) and several Chinese companies.

Dynamic Materials supplies a diverse customer base, ranging from energy companies to shipbuilders to the aerospace industry. Key customers include Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), General Electric Co. (NYSE: GE) subsidiaries GE Energy and GE-Aviation, Rohm & Haas Co. (NYSE: ROH), divisions of United Technologies Corp. (NYSE: UTX) Betchel, and Pratt & Whitney.

The year 2006 was good to Dynamic Materials. The company saw profits rise 42% with revenue growth of 30% (its stock has averaged annual returns of 208% over the past three years), earning it a seat on Fortune's 2006 list of the “100 Fastest-Growing Companies.” After a banner year, Debra Fiakas, CFA, an analyst with Crystal Equity Research, said her firm initiated coverage of Dynamic Materials “based on its growing dominance of the metals cladding market. Strong cash flow generation and a pristine balance sheet provide resources for future growth initiatives."

DMC's revenues totaled $33.1 million in the first quarter of 2007, a year-over-year increase of 32%. The company's backlog in the first quarter was $68 million, compared with just $34 million two years earlier. A record backlog is expected in the second quarter. These impressive numbers have helped propel Dynamic Materials to the eighth spot on Business Week's annual list of “100 Hot Growth Companies.”

In May, the company received an $8.3 million windfall in the form of an order from an undisclosed U.S. customer. Yvon Cariou, president and CEO, said in a news release that the opportunities in the energy sector “clearly extend beyond the conventional oil and gas industry. We believe the traditional and alternative energy markets both present significant long-term prospects for DMC."

Following the announcement, Yvonne M. Varano, an analyst with Jefferies & Company, Inc. said:

We continue to believe there are additional significant projects on the horizon (well into 2009) that should further fuel demand for DMC's explosion-welded products.

Early last month, on the Seeking Alpha, Crystal Equity’s Fiakas concurred:

Indeed, we do not believe the story is over for Dynamic Materials. Our field work suggests there is considerable more opportunity for capture of market share and consequently for top-line growth.

The experts' bullish sentiment doesn’t stop there. Jefferies’ Varano gives the company's stock a "buy" rating and projects EPS growth rates of 20-25% over the next several years. And on June 15 BOOM shares were rated "buy" in new coverage by analyst Avinash Kant at First Albany Capital. Kant wrote "Explosion cladding presents the best and the most economic solution for corrosion resistance applications in several key high-growth markets, such as oil and gas, oil refining, petrochemicals/chemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, and industrial refrigeration. " Kant added, "As a leader and consolidator in this market, the company should gain significantly from this long-term trend."

In a July 2 update, Kant reiterated the First Albany's "buy" rating and $43.00 price target.

"Our current estimates call for 20% revenue growth in 2007 and 2008. Given the high revenue growth, we believe a 20x multiple of earnings is quite justified for the stock. Our EPS estimate is slightly lower than the consensus due to conservative margin assumptions," he noted.

Collectively, analysts put an average 1-year price target of $43.67 on the stock, which on Friday closed at $40.05 after setting a 52-week high earlier in the session of $40.24.

Like any other company that routinely uses explosives as a part of processes, DMC risks suffering debilitating losses—to facilities, equipment, and most important, workers—in the event of an explosion. (Regulators place strict controls on sites where this process is performed.) Other key risks are associated with the whims of the marketplace: the availability and price fluctuation of some of the materials used in the metal cladding process, such as titanium, nickel, zirconium, and carbon steel.

But analysts don't seem worried.

"Given the company’s exposure to areas that are seeing a strong global growth trend, we are very optimistic about the long-term growth potential of Dynamic Materials," says First Albany’s Kant. "We have modeled 20% year-over-year revenue growth in both 2007 and 2008."

Wall Street watchers agree that the company's recent explosive growth is anything but a fluke. And considering DMC’s strong backlog, the steady growth of the global economy, and the strength of the end markets supplied by Dynamic Materials, the company is poised for ongoing growth and market share gains.

Indeed, based on DMC's record and future prospects, investors have every reason to believe the company will continue to send shock waves through portfolios everywhere.

BOOM 1-yr chart


Disclosure: none