Over the last month, the company has been trading between $38.0 and $40.3
Please visit this Google Doc Spreadsheet to see all the underlying data and calculations for this analysis; you can also refer to the stock review explained post if you have questions on what I look for in this stock review
1- Business Performance (+/=)
|FCF / Sales||LTM: 12.3%, lower than the 3 and 5 year averages. Other than 2000-02, FCF/Sales has generally been over 10%|
|ROE||No data before 2004. ROE is currently 19.9%, down from higher levels in previous years, probably inflated due to a succession of leverage buyouts|
|ROA||LTM: 8.3% which is ok but not great; ROIC is at 10% still acceptable but lower than my goal of ~12%|
|Revenue Growth||Revenue growth has been strong over time, with a 3 and 5 year growth averages at 13 and 15% respectively. However this growth has slowed in 2009 and over the last quarter, with an expected growth rate of ~6% in the future|
|Cash distribution to shareholders|| Dividend: KIC does not pay a dividend|
Stock repurchases: Over the last 5 years KIC only bought back about 3% of shares, using FCF instead to repay debt.
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KIC’s business overall seems strong with good cash flow generation, and strong revenue growth over time albeit lower in recent quarters. The company’s returns while solid may be distorted by a series of leverage buyout/recaps making the measure less meaningful.
2- Intrinsic stock returns (+)
Using the assumption of 6% growth and 20% ROE, intrinsic stock returns could break down as follows:
|% Return||%use of earnings|
This is a fairly high return, however I don’t believe that the company will be accumulating cash given its debt position.
3- Balance Sheet (-)
|Current Ratio||2.1x which is acceptable|
|Debt / Equity||Total debt / equity is currently at 0.8x, below my threshold of 1.0x…|
|Debt / FCF||…however Total Debt / FCF is at 4.6x which is too high a level for me. This represents over a billion in debt for a company with a FCF of $250M|
4- Valuation (+)
|Price to earnings ratio (TTM)||11.4x, lower than the S&P and the company’s average of 14.8x over the last 5 years|
|Price to earnings ratio (3-yr average EPS)||13.0x, which is low – leading to an earnings yield on that basis of 7.7% which is higher than my yardstick of 2x AAA-bond rate|
|Cash Return||7.7% which is attractive|
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Overall KCI’s valuation appears to be quite attractive, both on a relative basis (vs. past 5 years and vs. S&P500) as well as on an absolute basis (earnings yield in excess of 2x AAA-bond rate)
While KIC appears to be a good business, its current balance sheet is too leveraged for me making it an unlikely investment candidate, despite attractive potential intrinsic returns and good valuation. I will not keep KIC in my watch-list and will not proceed to a more detailed stock analysis.
Have you looked at KIC recently? What was your conclusion?
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Many happy returns!