Completed my buying of KTEC for my "swing for the fences" stock and can finally post my notes. Key Technology is a small ($83 mil revenue; 483 employees) company that makes food- and material-processing automation equipment. Using some rather impressive optical and process technology, their systems are used to evaluate fresh fruits and vegetables, beans, potato chips, snacks, and wood products. Items can be sorted by color, size, and shape to identify defective or inconsistent products for removal by a blast of air while processing huge volumes. The company also makes conveyor and sorting systems for the pharmaceutical, tobacco, and coffee industries. Key Technology has plants in Washington, Oregon, and overseas in the Netherlands.
As I was thinking about James' challenge, I was thinking successful picks need to have the following characteristics: under the radar or misunderstood, some inefficiency built into the current stock price, growing if not outstanding fundamentals, and a strong chart. I think KTEC is such a company, but it took some time to complete my DD and build a position. My research led to the pleasant surprise that I had a college buddy who is now a CEO living out of state and sits on the KTEC board. He's a high integrity guy and I trust him; took awhile to get a hold of him but we had a nice conversation about KTEC.
KTEC needed some time to digest recent acquisitions and wring out some costs; this plus the downturn in the economy led to a loss in 2001. KTEC's revenues and earnings growth are 21.0% and 200.0%, respectively, in the company's most recent published filing. Q1 results will be announced Jan. 29. The company told me the seasonality of their business has led in the past to strong orders in Q2.
They've reduced debt to $6.2 mil in 2003 from $40mil in 2000. Have excess cash now and strong cash flow.
The company did $1.15 last year and $.47 in 2002. KTEC does not give EPS guidance, but Needham came out this week with a 2004 estimate of $1.40. (Forward PE of 11.82) When I talked to the company they pointed out that they have a goal to double their revenue in 5 years. Using that 15% growth rate for EPS, I show a nice upside:
Company: KTEC
Date: 1/12/04
Next year's expected earnings: $1.40
Estimated EPS growth rate: 15
P/E maximum used for estimate: 15
Graham Fair Value: $44.35
Current Price: $16.55
$ difference: $27.80
Percent Growth to Fair Value: 167.9%
Per MarketGuide, KTEC's ratios looks good compared to others in the miscellaneous capital goods sector (vs. industry average):
P/Cash Flow 11.6 (16.6)
P/Free Cash Flow 6.0 (28.7)
P/Sales 1.0 (1.8)
P/Book 2.6 (4.0)
P/Tangible Book 4.3 (6.8)
P/E 14.3 (25.1)
EPS 5 yr. growth rate 42.6% (3.7%)
Total Debt/Equity .1 (.7)
ROA 11.4% (6.8%)
ROI 17.6% (8.7%)
ROE 21.8% (12.5%)
Gross Margin 41.1% (31.4%)
Profit Margin 7.0% (6.3%)
They are #1 in the food and tobacco market (inspection products, 35-40% of revenue) and #1 in fruit, vegetables, and fries (process products, 35-40%). The remaining revenue comes from parts and service. They have 53 US patents and 21 non-US.
Even though it is thinly traded, 32% of KTEC stock is held by institutional holders. 4.85mil shares outstanding; 3.9mil float.
The presentation held last week at the Needham Growth Conference in New York can be accessed on the Investor Relations page of the Company's web site located at www.key.net/investor.cfm.
ValuePro gives an Intrinsic Value of $32 with only a 10% growth rate:
valuepro.net
Good looking 1 yr. chart.
stockcharts.com[h,a]daclyiay[pc20!b50!f][vc60][iut!Ub14!Lc20]&pref=G
Stock has been showing strength in the last month. TA indicators look terrific:
quotes.barchart.com
KTEC has the highest possible rankings for revenue, NI, CF, ROE, ROA, ROIC, debt, PE, PS, and PEG:
quicken.com
Last Q headline:
Key Technology Sales Rise 18% for FY2003 and 21% for Q4
Full Year Diluted EPS hits $1.15, Backlog up 33%
Snip:
New orders received during the fourth quarter were $23.2 million, compared to $13.6 million in the same period last year. The Company's $20.1 million backlog at September 30, 2003 reflects a 33% increase compared with the $15.1 million backlog at the close of fiscal 2002.
CEO comment: "The order volume in the fourth quarter was the highest recorded in the Company's history for that period and reflects what we believe is an improving capital investment environment among our customers. We are particularly pleased that we are winning orders for multiple systems from our larger customers, as this bodes well for future business. While we anticipate some normal seasonal effects during the first quarter of the new fiscal year, we are encouraged with our healthy year-end backlog and are optimistic about our prospects in fiscal year 2004." |
