KAMN - Kaman Stock Held Back By The Weight Of Debt
2023-10-27 13:41:02 ET
Summary
- Kaman operates in the aerospace and defense, medical, and industrial markets.
- Analysts expect a decline in earnings per share for Q3 2023, but the company has a history of beating estimates.
- Kaman pays a quarterly dividend of $0.20, bringing its yield to 4.28%. The dividend has not increased since 2017.
I'm continuously looking into new potential investing opportunities in the aerospace and airline industry. Some stocks eventually turn out to be rewarding opportunities while others do not. I currently have a list of nearly 75 aerospace and airline stocks including a rating for each stock and I continue to add to that list. In this report, I am adding Kaman (KAMN) to that list. The company lost more than 40% of its value over the past 12 months and in this report I want to analyze whether that offers a compelling discount or whether it has fundamentally driven downside to the stock. Since this is my first time covering Kaman, I also will provide a brief description of the company’s activities.
What Does Kaman Corporation Do?
Kaman Corporation conducts business in the aerospace and defense, medical and industrial markets. The company operates through three segments:
- Engineered Products
- Precision Products
- Structures
The Engineered Products segment serves the aerospace and defense, industrial and medical markets providing sophisticated, aircraft bearings and components, super precision, miniature ball bearings, spring energized seals, springs and contacts, and wheels, brakes and related hydraulic components for helicopters and fixed-wing and unmanned aerial vehicle aircraft.
The Precision Products segment serves the aerospace and defense markets providing precision safe and arming solutions for missile and bomb systems for the United States and allied militaries, subcontract helicopter work, restoration, and others.
The Structures segment serves the aerospace and defense and medical end markets providing sophisticated complex metallic and composite aerostructures.
In 2022, Kaman had sales of $688 million split 80-20 between OEM sales and aftermarket. Its end markets include defense, commercial, business and GA, medical and industrial. With a significant exposure to defense, things should bode well but it also should be noted that the structures business was barely profitable in 2022 due to lower Black Hawk and A-10 program sales offset by higher P-8A Poseidon program sales.
The Engineered Products segment benefited significantly from the Wheel & Brake acquisition from Parker-Hannifin ( PH ) completed in September 2022. I went through the March 2023 Investor Presentation and what I found to be lacking is a tangible plan. The company is focused on execution, enhance free cash flow generation and improved return on invested capital but there was little provided in the slide deck on how the company wants to do that.
The positives probably are that commercial sales are taking a bigger piece of the pie and sales to Boeing and Airbus had fully recovered by Q2 2023 with more after-market exposure, but the Structures business remains very low margin and lower Join Programmable Fuze sales are putting a $0.19 cent pressure in earnings per sale, offsetting the positive contribution the acquisition of the Wheel & Brake business has.
What's The Analyst Consensus For Q3 2023 for Kaman?
For Q3 2023, analysts are expecting revenues of $180.43 million, representing 4.9% year-over-year growth but earnings per share of $0.08 provide a 75.28% decline. So, things are not looking good, but the company has beaten EPS estimates 5 out of the last eight quarters, and over the past three quarters it has beaten analyst estimates. On revenues the track record is worse, missing analyst estimates six out of the last eight quarters.
Kaman Guidance For 2023
For 2023, Kaman expects revenues of $730 million to $750 million providing 6%-9% revenue growth. Its interest expense will be $5 million higher than initially guided offset by higher margins. The expected adjusted EPS of $0.29 to $0.56 still does not compare favorably to the $1.12 reported in 2022 driven by higher interest expenses related to acquisitions. The company excludes discrete items such as unawarded orders, sale of aircraft held in inventory and assumes no margins for its structures business even though a profit has been booked year to date. So, it could be the case that the company is too conservative, but if certain awards or sales were to slip that also would impact the outlook if Kaman were to include these items.
Does Kaman Corporation Pay A Dividend?
Kaman does pay a quarterly dividend of $0.20 bringing its yield to 4.28%. The company has a strong history of 33 years of consecutive dividend payments, but the dividend has not increased since 2017.
Is Kaman Stock A Buy?
Kaman is benefiting from the uptick in commercial airplane productions which should benefit the wheels and brakes business as well as commercial bearings, but the joint fuze program and higher interest expenses are putting a significant damper on earnings per share and free cash flow. So, it's not all that certain whether the company’s stock is a buy even after a 40% drop in share prices over the past 12 months.
I ran the numbers for Kaman and driven by its weak three-year alpha, the company is a hold rather than a buy. Upside, however, does exist with 66% upside compared to a median industry valuation and 26% compared to its company median. Given that the company currently is trading at a multiple that's significantly higher than the industry median, I would put a $31 price target on the stock with the note that in case the $199.5 million convertible notes due 2024 are not exercised and are fully paid off, Kaman will need to dip it its existing credit lines to pay for the notes on maturity. The company already has positioned for that by extending the maturity on the credit agreement to 2028, allowing the company to borrow from the credit line to pay for the notes.
Conclusion: Kaman Is A Hold As It Reinvents Growth
I mark Kaman stock a hold as its current results are impacted by high interest expenses, but the company does face the need to add to debt to pay off its notes maturing 2024 absent of conversion. As its credit agreement matures in 2028, the company has space to benefit from increased demand in defense and commercial aerospace.
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Kaman Stock Held Back By The Weight Of Debt