KHD Humboldt Wedag International (KHD) is probably the most under appreciated stock I know. This is a company in an essential industry, providing its service and products in the fastest growing parts of the world. It has a growing backlog of orders and excellent margins. It also sits on a pile of cash that is half the market capitalization. Yet the stock sits near the bottom of the 52 week trading range. Later I will give my thoughts on why the stock is so undervalued. First, a recap of some numbers comparing the 2nd quarter of 2008 with the same quarter of 2007.
- Total revenue: $144 million, down 9%.
- Net income: $19 million, up 88%.
- Income per share: 63¢, up 85%.
- New orders: $320 million, up 105%.
- Order backlog: $1.3 billion, up 96%.
- Cash and cash equivalents: $445 million up $220 million.
Do not worry about the decreased revenue, the company is still well ahead of 2007 for the first 6 months of 2008 and has been able to increase its gross profit margin by over 4% to 19% in the last year.
KHD is an infrastructure company in the business of selling and installing proprietary concrete, coal and mineral processing equipment. The company’s business is focused in the growth areas of Russia, Eastern Europe, the Middle East and Asia. Recent growth initiatives have focused on increasing the range of services it offers its customers. (i.e.-it designs and completely builds a concrete plant rather than just selling and installing its own equipment.
The company's business lines plus its market area point to an almost endless supply of future business. Management has worked hard to ensure KHD gets its share of the most profitable projects. At this point growth is primarily limited by the company’s ability complete customer projects on a timely basis and it is controlling the addition of new business to not get behind on what it can deliver.
After listening to the conference call, I could write pages on the positive aspects of the management of KHD. The company is conservative in its bookkeeping and aggressive in pursuing new sources of revenue. I see no break in the growth trajectory for years to come.
I promised earlier I would give a few reasons why I think the stock price is lagging in relation to KHD’s growth and prospects:
- Until about two years ago KHD was primarily a merchant bank with a sideline in industrial plant engineering. It has shed most of the financial business lines, but it appears the investing world has not yet discovered the new KHD.
- The company is headquartered in Hong Kong and does a large amount of business from offices in Europe. There is almost zero western hemisphere exposure besides listing on the NYSE.
- The stock is followed by one reporting analyst who just regurgitates the company’s overly conservative guidance.
- KHD is a small (but very profitable) speck in the very large infrastructure market sector.
- The name: KHD Humboldt Wedag, Ltd.
At this point the company stock is trading at around 13 times 2008 earnings while revenues and earnings are growing at multiples of the multiple. At some point management will put the cash hoard to work to further increase shareholder value. I will be holding my stock until it reaches multiples of the current price. KHD is a component of this site’s Special Opportunities Portfolio.
Note: I currently have a long position in KHD.