Kaman: Recent Acquisition And Portfolio Reshaping Positions It For Success

Summary

• Kaman Corporation's wide range of products makes it a significant participant in the aerospace and defense sector.
• The company is well-positioned for long-term success despite current industry challenges due to its focus on cost structure simplification and core growth possibilities.
• Kaman's recent acquisition of Parker-Hannifin's Aircraft Wheel & Brake division positions the business for future growth and profitability.
• The company faces potential future risks due to its reliance on government contracts and potential environmental restrictions and sustainability issues.

Tashi-Delek/E+ via Getty Images

With a wide range of goods and services, Kaman Corporation (NYSE:KAMN) has made a name for itself as a significant participant in the aerospace and defense sector. Given its strategic ambitions and possibilities for long-term, sustainable growth, Kaman is, in my opinion, a fantastic investment opportunity.

The company is well-positioned for long-term success despite current industry challenges thanks to its focus on cost structure simplification and core growth possibilities. The business has a track record of innovation and experience in the aerospace and defense industries, which offer it a competitive edge in the quickly growing precision goods and services market.

Kaman confronts fierce competition from other specific industry players like Timken Corporation (NYSE:TKR) when it comes to their bearing and engineered products business. In my opinion, its distinctive product portfolio, brand recognition, and operational excellence give it a significant advantage. The company's outstanding financial metrics demonstrate its sound financial condition and promising future growth.

An Improving Balance Sheet

Recently, Kaman Corporation has taken important steps that could portend tremendous growth and profitability for investors. Kaman is now better positioned for growth and enhanced capabilities in the aerospace sector thanks to the company's most recent acquisition of Parker-Hannifin's Aircraft Wheel & Brake division, which is its largest acquisition to date.

Kaman's consolidated results for the third quarter of 2022 were supported by performance in Engineered Products despite program and supplier issues, highlighting the company's capacity to adapt and stay competitive in a difficult environment. Kaman is doing well, with net sales of $172 million and a gross margin of 32.5%. Adjusted EBITDA grew to a strong $20.6 million, indicating that the company is on the right track for persevered growth.

ycharts.com

When compared to the second quarter of 2022, Kaman Corporation's operating income and adjusted EBITDA improved, due to an increase in sales and margin for the Sikorsky UH-60 Black Hawk program, despite the company's financials for the third quarter of 2022 being down from the same period a year earlier. Operating income, adjusted EBITDA, and margin all declined for the company compared to the third quarter of 2021, mostly as a result of fewer sales of Kaman's Joint Programmable Fuze (JPF) and K-MAX products.

kaman.com

Kaman's sales of commercial aerospace bearings and seals, springs, and contacts in industrial applications saw significant growth, offsetting the lower sales of defense and industrial bearings. This shows that the business's diverse portfolio is well-positioned to weather market turbulence and foster long-term growth.

Diverse Products and Services

Kaman’s Aerospace Segment provides a range of high-performance bearings, mechanical actuators and systems, and parts for unmanned aerial vehicles, military and commercial aircraft, and missile and weapons systems. Kaman is an important player in this market as a result of the significant demand for these products in the aerospace industry, which is predicted to rise going forward.

The Industrial Division also provides a variety of goods and services to the industrial market. These comprise items utilized in industrial machinery such as bearings, power transmission, electrical, automation, and fluid power products. Kaman's knowledge and product offering in the aerospace sector has been strengthened by the acquisition of Parker-Hannifin's Aircraft Wheel & Brake division, positioning the business for future growth.

Recent Portfolio Restructuring and Consolidation

The recent announcement by Kaman Corporation of portfolio reshaping initiatives is a strategic move, in my opinion, that will ultimately improve the company's long-term financial performance. The company expects to save $25 million in yearly run-rate costs through restructuring measures, which will significantly improve the cost structure and concentrate resources on the most promising growth prospects.

kaman.com

Although the company will incur at least $54 million in non-cash charges related to the write-down of existing aircraft, contract costs, excess spare parts, and equipment inventories, as well as an estimated $10 to $12 million in pre-tax restructuring charges, I believe that these measures will eventually lead to significant cost savings and an increase in earnings.

Furthermore, the company's courageous choice to stop producing the K-MAX demonstrates its readiness to concentrate on its core operations and expansion prospects. Although Kaman has created and built 60 K-MAX helicopters with unparalleled accuracy and efficiency over the past 30 years, the company has decided that K-MAX does not now present the most compelling growth prospects. This tactical choice will free up resources to concentrate on more lucrative opportunities going forward.

I believe that Kaman's move to consolidate JPF manufacturing, reduce manpower, eliminate non-value-added activities, and optimize its facilities and operations will eventually boost earnings and spur meaningful development in its core industries. Although taking these steps could be difficult in the near term, they show Kaman's dedication to long-term sustainable shareholder value. The recent portfolio reshaping initiatives are a step in the right direction toward enhancing the business's financial performance while looking at the grander context of things.

Potential Future Risks

I believe that the Aerospace and Precision Products market is indeed facing some significant risks that could impact Kaman Corporation's future growth prospects. A major danger to Kaman Corporation's prospects for future growth is the company's reliance on government contracts. Several businesses in the aerospace and precision products sector rely heavily on government contracts for their income. Kaman's financial success, however, might be directly impacted by budget cuts or policy changes that affect the industry's capacity to win contracts. To reduce the risks connected with government contracts, the business must adapt to these developments and diversify its revenue sources - admittedly, this seems unlikely to near-impossible in the short-term, but is a concern that remained to be addressed in the long term.

Last but not least, environmental restrictions and sustainability issues can affect Kaman's possibilities for future growth in the aerospace and precision product industries. There may be a trend toward more sustainable goods and services as people and businesses grow more environmentally conscious. To change with the times and stay competitive in the market, Kaman Company will need to make R&D investments into sustainability as the sector is clearly trending towards valuing such concerns highly.

Facing the Competition

Timken Company and Kaman Corporation stand out as two well-established companies in the fiercely competitive bearing subsector that they both operate in. However, after examining both businesses, I believe that Kaman has the better outlook.

Kaman differs from Timken in that their product line is more varied and distinctive, covering everything from bearings and components to distribution services. The company has a competitive advantage thanks to its broad selection of goods and services that are suited to particular end markets.

Kaman outperforms Timken in terms of financial performance. With a strong balance sheet and regular cash flow generation, Kaman has been able to reduce costs and boost financial performance. On the other hand, Timken has had difficulty producing the same level of financial returns due to its smaller portfolio.

Another important distinction between Kaman and Timken is its emphasis on R&D and innovation. The business can innovate and develop new technologies fast and effectively because of its committed R&D team and cutting-edge infrastructure. Timken, in contrast, invests less in R&D and takes a more gradual approach to innovation; in a sector as competitive as aerospace and defense, this could prove to be detrimental in the long run.

Improving Valuation Metrics

In my opinion, Kaman Corporation is undervalued compared to its peers in the aerospace and defense sector. Its current Price-to-Sales ratio of 1.05 is 25% lower than the sector's P/S ratio of 1.40. Similarly, its forward Price-to-Sales ratio (FWD) of 1.00 is 28% lower than the sector’s P/S ratio calculated as 1.39. While the P/S ratio is a more straightforward measure of the company's financial performance, the P/B ratio is also important although it can be influenced by accounting practices and the company's capital structure, which is especially relevant given the recent restructuring. With that being said, its improvement over the sector median is even greater with its Price-to-Book ratio (TTM) of 0.91 being 65% lower than the sector’s ratio of 2.59, while its Price-to-Book ratio (FWD) comes out to be 0.91 ─ lower again by 65% against the sector’s P/B ratio, recorded at 2.56.

seekingalpha.com

Given Kaman’s recent strong financial results characterized by increasing earnings and revenue figures, I am confident that the company has tremendous potential for future growth and profitability. As a result of the company's strategic focus on its core activities, the market may now have more faith in KAMN's capacity to create income, which could explain the more favorable valuation as of late. Of course, these value indicators should not be seen in isolation; rather, they should be examined in conjunction with other elements including the company's financial statements and current news and events.

Concluding Thoughts

Recent portfolio rearrangement initiatives by Kaman have put the company in a position to spur significant development in its core businesses and raise earnings over time. Its ability to reorient its operations to concentrate on higher-margin goods and services while selling off low-profit ventures like the K-MAX helicopter is a credit to the strategic vision and execution skills of the executive team.

Furthermore, Kaman will be able to maintain its competitiveness in the aerospace and precision products industries thanks to its focus on high-growth possibilities and flexibility in responding to shifting market dynamics and consumer needs, such as the move toward consolidating JPF manufacturing. Kaman's recent initiatives to streamline its cost structure will surely boost its earnings and promote long-term profitability.

Overall, I think Kaman Corporation is poised for long-term development and profitability and has a favorable financial future. Hence, Kaman represents a fantastic investment opportunity for individuals seeking to put money into a business with a solid financial outlook and a clear route to long-term success.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.