KMG Chemicals: The Story Is Playing Out

Dec. 17, 2017 2:26 AM ETKMG Chemicals, Inc. (KMG)
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  • KMG shares are outperforming the broader market by a wide margin, and I believe that the outperformance will continue through 2018.
  • The company reported Q1 2018 results that blew away analyst estimates.
  • KMG is a long-term buy at today's price.

On December 12, 2017, KMG Chemicals' (NYSE:KMG) stock finished the trading day up 14% after the company reported strong quarterly results to start its new fiscal year. This one-day jump contributed to the already impressive YTD stock performance for KMG shares (shares are up over 60%), as the stock is now outperforming the broader market by almost 50 percentage points.

As I described in early September 2017, KMG is an unknown specialty chemicals company that is "worth a look" (the stock is up 35% since that article was posted). In my opinion, KMG's Q1 2018 results show that the company's long-term story is still intact and that there is potentially a lot of room for shares to run.

The Story Is Playing Out

My investment thesis for KMG revolves around the fact that this small specialty chemicals company has several promising businesses that have great long-term prospects. For example, KMG's electronic chemicals business has experienced strong earnings growth and this operating unit should continue to benefit from a high demand for semiconductors.

(Source: August 2017 Investor Presentation)

Additionally, KMG has a strong position in several key markets and it has established long-term partnerships with plenty of major players in the space.

The company also recently acquired Flowchem, which is a key player in the drag-reducing agents ("DRAs") industry. Moreover, the Flowchem acquisition diversifies KMG's business by creating a brand new material revenue stream that should benefit from a recovery in [or stabilization of] the oil and gas industry.

(Source: August 2017 Investor Presentation)

KMG has great businesses under its umbrella and I believed that the market would soon reward this company (and its shareholders) for its future growth prospects. So far, my investment thesis for this company has been playing out and, in my opinion, KMG's Q1 2018 results show that I may not have been

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I first recommended KMG to subscribers of my premium service in May 2017, and shares are up ~16% over the last seven months. This is one of the many winners that I have recommended to subscribers of Going Long With W.G. [I recommend at least 2 small-cap (under $10 billion) companies every month].

This article was written by

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Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are long KMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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