gorodenkoff
Towards the end of May, I looked at shares of Kaman Corporation (NYSE:KAMN) after it acquired some quality assets from Parker-Hannifin (PH) in a deal which came after a difficult period. This followed the unfortunate decision of the company to become a pure play on aerospace just ahead of the pandemic and a period of soft operational performance which logically followed.
Some Background – 2019
Kaman was essentially two businesses under a single roof in 2019. The aerospace business generated some three-quarters of a billion in sales from commercial, defense, and fuzing businesses, on which it posted operating margins of around 13%, segment margins.
The company had a larger $1.1 billion distribution business with revenues generated from bearings, power transmission, automation, and fluid power. While the business was substantially larger in terms of sales, margins only came in at 4%, as these segment margins were reported ahead of substantial corporate cost allocation charges.
On $1.9 billion in sales, Kaman posted earnings of nearly $3 per share with GAAP earnings coming in a dollar lower. Valuations were quite demanding at $63 per share, translating into a $1.8 billion valuation, or $2 billion after factoring in net debt, with this debt load being equal to about 2 times EBITDA.
In a rather decisive move, Kaman sold its distribution business in a $700 million deal in 2019, albeit that net proceeds came in a hundred million lower following taxes and transaction costs. With non-GAAP pro forma earnings falling from $3 per share to $2.40 per share, the situation looked interesting given a pro forma net cash position of $344 million, or $12 per share. Despite the interesting situation, I concluded that Kaman remained a ¨show-me-first¨ story.
After this move, the pandemic soon broke out as shares fell to $30, recovered to $50 by year-end in 2020, and were back to $35 again in May. The 2020 results showed that revenues were up 3% to $785 million, in part aided by some distribution revenues still recovered, as adjusted earnings of $2.11 per share looked quite solid.
With 2021 sales seen around $735 million, and earnings seen between $1.55 and $1.87 per share, the situation was not that compelling. This came as the net cash position following the sale of the distribution business was already a thing of the past, with net debt incurred already.
As it turned out, 2021 revenues did come in at $709 million, falling short of the estimates, albeit that earnings of $1.93 per share were strong. The 2022 guidance was lackluster, with revenues seen at $730 million and earnings seen between just $1.75 and $1.90 per share.
With leverage reported around 1 times, the valuation looked reasonable at 18 times adjusted earnings at $35 in May as the company announced a huge deal. This came as the company acquired the wheel & brake business in a $440 million deal from Parker-Hannifin. The deal looked interesting as Parker was a motivated seller following an antitrust ruling, forcing the company to sell the unit. Following that purchase, I pegged pro forma EBITDA at around $125 million with net debt seen around $525 million, as net earnings could come in or just above the $2 per share mark.
I liked the deal as the acquired assets looked to be of high quality, yet I was fearful of the higher leverage and slow operational performance. While I did not buy any shares at $35, I was looking to enter a position on further dips, certainly if the business would stabilize, or certainly if it would improve.
What Happened?
In August, Kaman posted its second-quarter results. Sales fell nearly 12% to $161 million, up in a very modest fashion from the first quarter results. The company reported $16 million in EBITDA as earnings came in at $0.31 per share.
Full-year sales are now only seen between $700 and $715 million, below the initial guidance, in part driven by the strong dollar. EBITDA is now seen at $94-$99 million, as pro forma EBITDA of $125 million seems intact. Net debt of $117 million will result in a pro forma net debt load of $557 million, a bit higher than I estimated around the time of the announcement of the deal.
It is this softer operational performance and higher interest rate environment, which is painful with the higher leverage incurred, and quite frankly is hurting the business. The 28 million shares of the company have now fallen to the $30 mark, as the equity valuation has fallen to $840 million, for a $1.4 billion enterprise valuation if we factor in a relative steep net debt load.
Concluding Remark
With shares down $5 since May, on the back of a softer quarter, a strong dollar, and higher interest rates, I think the share price move is very fair as the company is facing (continued) headwinds.
While I was appealed to the business in May, and shares have become a bit cheaper (for very valid reasons), I am still attracted to the situation, but recognize that the situation has worsened, which makes that I am not hitting the buy button already.
Be the first to comment