KLX (KLXI) was spun-off of B/E Aerospace (BEAV) in December 2014. Since the spin off however, shares are off roughly 10%. With Guru’s such as Ken Fisher (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) invested in the stock, does the spin offer an attractive investment opportunity?
The Business
KLX operates through two main segments:
Aerospace Solutions Group: Provides fasteners, consumable products, and logistics services to over 4,700 aerospace customers around the world. ASG is a distributor for every major aerospace fastener manufacturer and carries one of the broadest ranges of aerospace hardware, consumables, and inventory management services worldwide (~1 million SKUs). With a large and diverse customer base, ASG serves commercial operators, business jet and military OEMs, as well as MROs and airlines.
Energy Services Group: Provides services and ”‹logistics for remote oil and gas drilling sites. Selling predominantly to regional or independent oil companies, the company has a strong presence across key production basins, including the Northeast, Rocky Mountains, and Southwest. This customer base includes nearly all major regional and independent E&Ps.
Growth Opportunities
Both segments are experiencing long-term, secular industry trends that should bouy the business for the foreseeable future.
Based on industry sources, during 2013 the market for the products and services provided by the ASG segment was approximately $4.7 billion. The major drivers for ASG’s products are fleet growth and usage (wear-and-tear). The world’s total commercial aircraft fleet and usage has been growing for decades, with a similar rate of growth projected through 2033.
For the ESG segment, technological advancements are driving increased complexity of drilling and extraction, creating a growing demand for technical services and products. Preference is given to suppliers who provide high-quality and reliable services such as KLX’s ESG segment.
Management
Being spun-off of B/E Aerospace, KLX was able to gain hiring access to some of the industry's most experienced managers. The entirety of the management team is well-suited for the job, including the Chairman and CEO (also the former founder of B/E Aerospace).
Valuation
While there are only two analysts covering the stock, EPS growth estimates are for 5% annually for the next five years.
This is significantly below management’s forecast for the next few years, potentially undervaluing the large amount of acquisition opportunities that company believes it can capitalize on.
Using this year’s projected EPS as a base, GuruFocus’ Reverse DCF Tool estimates that investors are currently pricing in just under 7% annual EPS growth.
Should management be able to hit their medium-term targets, this represents a significant investing opportunity. At management's 20% growth target, shares would be at least 20% undervalued.
For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.
