KMG Chemicals, Inc. (KMGB) is a manufacturer of specialty chemicals with an impressive record of growth in sales, earnings and cash flow for more than five years as shown in the following table:
($ amounts in 000’s except per share data)
FYE Sales Net Income EPS Opt Cash Flow
07-31-04 $43,610 $1,763 $0.23 $3,735
07-31-05 59,168 3,052 0.37 7,563
07-31-06 67,200 5,935 0.63 7,055
07-31-07 86,171 9,162 0.83 8,968
07-31-08 154,394 5,657 0.50 15,668
07-31-09 190,720 10,236 0.91 26,502
Trailing 12 Months
Ended 01-31-10 188,828 16,296 1.44 32,042
Based on the 03-12-10 closing price of $15.15 and 11.4 million diluted shares outstanding, KMGB is valued at just 10.5 times earnings for the 12 months ended 01-31-10 and has a market cap of $173 million, which is just under one times annual sales.
The source of the Company’s growth has been both organic and from strategic acquisitions. In February 2006 they purchased certain assets of an animal health pesticides business for $8.9 million. On December 31, 2007 KMGB acquired the high-purity wet process chemicals business of Air Products and Chemicals, Inc. for $75.7 million, which included $25.8 million of net working capital, a 215,000 square foot facility in Colorado, as well as a manufacturing facility and additional warehouse in Italy.
On February 25, 2010 they entered into an agreement to buy certain assets of General Chemical Performance Products, LLC for approximately $25.5 million, which includes a 48,000 square foot manufacturing facility in Hollister, California and the transaction is expected to close by the end of March 2010. The acquired business generated revenues of approximately $43 million in 2009. Because of KMG's strong generation of cash flow from operations it expects to fund the acquisition with available cash and borrowing from the Company’s revolving credit facility. Despite anticipating some dilution to earnings in the second half of the current fiscal year because of the closing and integration costs from this acquisition, the company still expects “solid results for the last two quarters, and another year of record earnings in 2010 for KMG.” Commenting on the future and after the integration, KMG does “anticipate this acquisition will contribute substantially to earnings.”
The stock price hit an all time high of $28.25 in July 2007 and thereafter dropped to as low as $2.25 in November 2008. Since then the stock price has generally been rising along with a nice increase in average daily trading volume but still averages just over 100,000 shares a day. After getting as high as $19.15 in December 2009 the stock price pulled back finding strong support in the $12-13 range and now appears ready for upside movement in the future.
Based on the impressive record of historical growth, the anticipated benefits from the recently announced acquisition, and the company’s objective to make similar strategic acquisitions in the future, I believe that the shares of KMGB are currently undervalued.
Disclosure: LLG Equities, LP has a long position in KMGB