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A Small-Cap with Big Potential - Kemet - KEM

March 05, 2008 | About:
Kemet Corp. [NYSE: KEM] Mar. 4, 2008 Close: $4.79

52-week range: $4.60 [yesterday] - $9.14 [May 7, 2007]

Kemet is the largest manufacturer of capacitors in the United States. Capacitors are ubiquitous in virtually all electronic systems. Kemet focuses on the two fastest growing segments - Tanalum and Ceramic capacitors.

They supply through distributors [47% of sales], OEMs [32% of rev.] and EMS [21% of sales]. North America, Asia and Europe are approximately 30%5, 40% and 30% of sales respectively.

FY 2007 [ends March 31, 2008] will likely see EPS of $0.39 versus $0.42 in FY 2006. Consensus estimates for FY 2008 are now at $0.49 or up about 25% year-over-year.

That means KEM shares now sell at just 12.3x trailing and < 10x forward projections.

The slightly down earnings year coupled with the weak stock market environment has pushed KEM shares to below their low prices since 1998. The shares have hit annual peak prices of $9.00 and higher in each year since 1995- most of the time when fundamentals were not as favorable as they are today.

Value Line expects a 20 P/E multiple for their 3- 5 year share price projections of $19 - $30. Even 15 times projections for FY 2008 leads to a very conservative 12-month target price of $7.35 or + 53% from yesterday's quote.

Long-term debt is a moderate 29% of capital and Kemet held $165 MM in treasury cash as of September 2007.

As of Dec. 31, 2007 these were some large holders:

[Dec. 31, 2007 price: $6.63/share]

Dimensional Fund Advisors - 8.83%

Sprucegrove Inv. Mgt. - 6.27%

Barclays Global - 5.42%

LSV Asset Mgt. - 5.42%

Brandes Inv. Partners - 3.82%

Deutsche Bank - 5.04%

AXA - 3.27%

Royce & Assoc. - 3.36%

Vanguard Group - 2.93%

Three of our gurus held Kemet at YE 2007 -

George Soros, A. Van Den Berg and Charles Brandes.

Kemet is a healthy, profitable, small-cap value trading near 12-year lows. Even just a bounce back to its year-end 2007 closing price would be a gain of over 38%. Kemet looks to have the 'capacity' to shock you with a 50% - 100% capital gain over the next 12 -24 months.


About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.7/5 (21 votes)

Comments

spedian
Spedian - 6 years ago
Looks like a very low margin commoditized business? KEM looks to be fairly priced, based on P/E, relative to its peers. Where are you getting your consensus estimates for '08 +25%? Also, based on DCF KEM looks fairly priced.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Estimates come from Yahoo Finance, AOL Finance, ZACKS and Value Line.

As noted 'the market' has valued these shares at much higher prices each and every year since 1995. Revenues per share and cash flow/share have doubled since 2003 making this very cheap.

Kemet has always been a low margin business. That didn't stop it from trading at around double today's price, and higher, year after year when the market mood has been brighter.

Tangible book value is over $6/share. Current assets minus current liabilities equals almost $4/share as well. Historical P/Es have generally been 15 - 20x earnings.

All those well regarded large holders at YE 2007, by definition, thought it was worth well above current prices.

If you don't like it- don't buy it.
DaveinHackensack
DaveinHackensack - 6 years ago
Stockdocx,

I asked you this question on the United Health thread, but since you may not have seen it there, I'll ask you again here:

You have posted dozens of stock ideas here recently. If you were running a concentrated portfolio, which of these dozens of stocks would be your top five positions, and why?

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Dave,

I don't do just five stock portfolios. For me, I like no more than about 5% of my money in any one idea so I typically have at least 20 positions.

I know many on this site like Buffett's view to 'keep all your eggs in one basket- but watch the basket closely'.

That's not what I do personally.
kfh227
Kfh227 premium member - 6 years ago
stockdox,

It seems like you come up with multiple ideas on a daily basis. I appreciate the ideas you provide, but almost think you provide to many ideas.

Please don't take it presonal, I usually look over all your posts and would rather see your current enthusiasm continue than to not see it at all.

kfh

DaveinHackensack
DaveinHackensack - 6 years ago
Stockdocx,

"I don't do just five stock portfolios. For me, I like no more than about 5% of my money in any one idea so I typically have at least 20 positions."

What are your twenty positions then? It seems as if you have posted a lot more than twenty stock ideas in the last few months.

"I know many on this site like Buffett's view to 'keep all your eggs in one basket- but watch the basket closely'.

That's not what I do personally."


I don't do that either, but stock picks from investors with concentrated portfolios carry more weight, because its clear that those investors have conviction in their positions. When you post dozens and dozens of stock ideas, it raises questions about your level of conviction in any of them. For example, do you still feel that SLM is "the best stock in America"? Is KEM better? Do you have equal conviction in all the ideas you have posted? Have you changed your mind about some of them?
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Two Company Officers made Insider Buys recently:


PAUL, ROBERT G. - Director

Bought 6000 shares @$4.24 .....March 12, 2008


LOOF, PER OLOF. - CEO, Director

Bought 62,500 shares @$4.29 .....March 12, 2008

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru Arnold Van Den Berg added 51% to his Kemet holdings in the March quarter with an average price of $7.00/share.

After the stock dropped further he bought an additional 247,385 shares on April 14, 2008 at an average cost of

$4.60/share.

As of that time he held 8,408,036 shares total.
mungerite
Mungerite - 6 years ago
Why was this not written up on this thread

An Undiscovered Growth Stock

Posted by: stockdocx99: Date: Oct 11, 2007 12:04am


KEMET [NYSE:KEM] Oct. 10th closing price = $7.41

Kemet is one of the largest manufacturers of capacitors, components needed for virtually all electronic products. KEM's profits and share price surged in the boom tech year of 2000 with EPS of $4.05 and a share price that reached $44.20. Losses in 2002 - 2004 followed and KEM shares fell out of favor.

Since regaining profitability in 2005 with EPS of $0.21 things have continued to improve. Earnings doubled in 2005 to $0.42, then grew 31% in 2006 and are projected to hit $0.55 for the FY ending March 31, 2008. Concensus estimates for FY 2008 are now $0.67 /share. KEM shares have yet to reflect this good news.

At $7.41 these shares trade for just over 11X FY 2008 estimates. They are only 1.1X book value and are at the lowest price/cash flow since late 1998 [the Asian Contagion period] when most tech stocks were badly battered and about to rebound brilliantly.

Value Line looks for these shares to command a 20 multiple over the 3 - 5 year period. Using that P/E assumption I can see a share price of $13 over the next 12 - 18 months. Possible? Reasonable? KEMET has traded at prices of $9 and up in each of the past 12 years. Only 3 of those years had earnings higher than are expected for next FY. Even a partial rebound to $9 would mean gains of over 21% from yesterday's close.

At just 11.1X forward earnings and very low p/bv and p/cf I'm a big buyer right here. Three solid years of growth with more good news expected. If KEM shares hit my real target of $13 it will be a 75% profit. Even if it should take 2 - 3 years that's a nice annualized return.

Risk? Not too much. The absolute low prices on these shares have been $6.10, $6.90 and $6.40 in 2005, 2006 and 2007 respectively.

batbeer2
Batbeer2 premium member - 6 years ago
Aw give the guy a break.

You just can't blame a guy for a black swan event like Zacks, Value Line etc. failing miserably in estimating earnings. Heck even Royce and Brandes fell for that one. At this rate they might get the p/e right though.

- Are you going to cut your losses ?

- What are the current estimates ?

- Do you feel this is now a multibagger ?

- Is this now 1% of your portfolio or has the rest managed to keep up in such a way that this is still 5% of your portfolio ?

Happy investing to All!

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