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Jonathan J. Smith

KDN AT A GLANCE

P/E ► 25.5 HIGH EV/EBITDA ► 12.0 AVG ROA ► 6.1% HIGH ROE ► 6.9% AVG Debt to Equity ► 0.133 VERY LOW Current Ratio ► 8.36 VERY HIGH Interest Coverage Ratio ► 309 VERY HIGH

 

 

 

 

 

 

Kaydon (NYSE:KDN) primarily sells friction control bearings and filtration products, and is the leading manufacturer of wind turbine bearings. It competes against the big three machine tools & accessories companies, Timken Company (TKR), Stanley Works (SWK) , and Kennametal (KMT) ; KDN's sales total is 18% as large as KMT's sales total.^[1]

To make up for lagging behind TKR, SWK, and KMT, Kaydon has invested in a booming niche market -- wind energy. Installed wind energy turbines in the United States grew 45% in 2007^[2] KDN has established itself as the market leader in wind turbine bearings and runs a facility in Germany -- the world's largest wind energy market. By investing in wind energy, KDN hopes to reduce its dependence on the struggling automotive industry (19% of sales). This strategy gave KDN higher 2007 revenue growth than SWK, TKR, and KMT.^[3]

Business Financials

Friction Control Products (70% of sales)

Friction Control Products manufactures bearings. Products include anti-friction bearings, split roller bearings, and specialty balls. These bearings are used in robotics, medical equipment , aerospace & defense, security, material handling, construction, and renewable energy markets. From Q1 2007 to Q1 2008, Friction Control Products net sales increased 22% in part due to increased demand for wind energy products and military products due to the Iraq war .^[4]

Velocity Control Products (17% of sales)

Velocity Control Products manufactures bearings These bearings are used in robotics, oil processing, machine tool, medical equipment, and amusement markets. Products include industrial shock absorbers, safety shock absorbers, velocity controls, gas springs and rotary dampers. 60% of Velocity Control Products sales are international. From Q1 2007 to Q1 2008, Velocity Control Products net sales increased 20% due to demand for oil processing products. ^[5]

Sealing Products (13% of sales)

Sealing Products manufactures ring and seal parts used for filtering. Products include engine rings, sealing rings and shaft seals. These products used industrial, aerospace and defense markets. From Q1 2007 to Q1 2008, Sealing Products net sales decreased 4% due to relocation expenses.^[6]

Kaydon's fiscal year ends March 29th of every year. From 2006 to 2007, net sales increased 12%, total cost increased 13%, and gross profit increased 10%.^[7] KDN leads the machine tools & accessories industry in net profit margin (13.47%).^[8] Total cost increased due to investing in wind energy and acquiring The Purdy Corp. In Q3 2008, KDN had a company record $201.5 million backlog due to wind turbine product demand.^[9]

Trends and Forces

Kaydon revamps portfolio by investing in the booming wind energy market.

With concern about greenhouse gases from coal-burning power plants, high coal prices, and high oil prices, alternate energy sources are booming. Wind energy is the most economical alternate energy source. Another green energy source, solar power is far less economical than wind energy. The world’s largest solar power plant is a 40MW project with one million solar panels, while the world’s largest wind power plant is almost 20 times the size at 780MW - nearly the as large as a traditional coal plant.^[10] Because of wind's ability to create electricity on a utility scale, the U.S. Department of Energy claims 20% of U.S. energy will be wind energy."^[11] Installed wind energy turbines in the United States grew 45% in 2007^[12] making it the world's second-largest wind energy market after Germany.^[13] The U.S. invested $9 billion in wind energy in 2007, and is projected to invest $65 billion from 2007 to 2015.^[14] Kaydon recognizes wind energy's potential and has invested heavily in it.

Kaydon manufactures turbine bearings used to generate wind energy. With the potential of wind energy, KDN wants to improve turbine bearing production and product research so it can gain market power and increased revenue. Kaydon invested $25 million in 2006 and $80 million in 2007 for wind energy.^[15]From 2006 to 2007, wind energy sales increased $11.7 million and contributed to 8% of total sales. In Q3 2008, KDN's wind energy products had $60 million backlog, contributing to the company record $201.5 million backlog in that quarter.^[16] KDN sells wind turbine bearings to seven of the top 10 wind turbine manufacturers, including General Electric, Vestas, and Enercon. In 2007, KDN was the market leader in wind turbine bearing sales.

Kaydon competes against the machine tools & accessories oligopoly by producing niche products and supplying to unique end markets.

The machine tools industry is controlled by three companies: TKR, SWK, and KMT. Even though Kaydon has the fourth-highest total revenue in the industry, its revenue is 18% that of the third-highest, Kennametal. Since the big three have more capital than KDN, they can outbid KDN for acquisitions and invest more in product research. KDN competes against the oligopoly by manufacturing niche products and supplying products to several end markets. While the entire machine tools industry is dragging in the remodeling and automotive industries, KDN has uniquely made investments in markets unique to them, including wind energy, medical equipment, and cooling systems. In 2007, 8% of sales were in the wind energy industry, 4% of sales were in the medical equipment industry, and 3% of sales were in the cooling systems industry (no KDN end market accumulates more that 19% of sales). From 2006 to 2007, KDN had higher revenue growth (11.9%) than SWK (11.5%), TKR (5.3%), and KMT (2.4%).^[17]

2007 Sales to End Markets^[18]

Kaydon expands internationally in response to declining U.S. markets.

KDN manufactures bearings to multiple end markets, as no end market represents more than 20% of sales. KDN's biggest end market, U.S. automobiles (19% of sales), has seen declining production. KDN's investment in wind energy and international expansion have reduced revenue loss. In 2007, 32% of KDN sales were international.^[19] The company hopes to increase that number by it's acquisition of Avon Bearings and focusing more on it's German supplier.

• KDN acquired Avon Bearings to increase sales in China. - KDN acquired Avon Bearings on 06/28/08 for $55 million to strengthen their wind energy segment.^[20] Avon specializes in manufacturing large-diameter turntable bearings for wind energy stations. China has high wind energy potential, and KDN wants Avon to supply wind turbine parts. Avon is predicted to add $30 million sales in 2008.^[21]

• KDN's German facility prospers in Europe. The German facility services Western Europe, Eastern Europe, and India. Since Germany is the world's largest wind energy market, KDN produces primarily velocity control products at the German facility. Germany is KDN's number one international seller with 29% of international sales and attributed to KDN's $60 million backlog in wind energy products.

Competition

Machine Tools & Accessories

• Kaydon (KDN)- Leading manufacturer in specialty bearings, especially wind turbine bearings.
• Timken Company (TKR)- World's largest manufacturer of tapered roller bearings and steel alloy.^[22]
• Kennametal (KMT) - Leading global producer of tools, machine accessories, and advanced materials and second largest metal cutting tools manufacturer in the world.^[23]
• Stanley Works (SWK)- World-renowned brand of consumer and industrial tools.^[24]
• CompX International (CIX)- Manufactures security products and precision ball bearing slides.^[25]
• Hardinge (HDNG)- Manufactures machine tools in Western Europe.
• Thermadyne Holding (THMD)- Producer of gas and electric arc cutting and welding products for the Americas.
• RBC Bearings (ROLL)- Bearing manufacturer makes 90% of sales in U.S., has second-highest return on equity in the past year.^[26]
• Flow International (FLOW)- Producer of high-pressure waterjet cutting tools had highest revenue growth of machine tools companies in the past quarter.^[27]

References

1. ↑ Yahoo! Finance: Machine Tools and Accessories Leaders and Laggards
2. ↑ New York Times, "Move Over, Oil, There’s Money in Texas Wind," 02/23/08
3. ↑ Yahoo! Finance: Machine Tools and Accessories Leaders and Laggards
4. ↑ [www.kaydon.com Kaydon Key Banc Presentation 06/05/08]
5. ↑ [www.kaydon.com Kaydon Key Banc Presentation 06/05/08]
6. ↑ KDN Q1 08 10-q, Item 6: Business Segment Information, page 6
7. ↑ KDN 2007 10-k, Item 6: Selected Financial Data, page 9
8. ↑ Yahoo! Finance: Machine Tools & Accessories Leaders & Laggards
9. ↑ Seeking Alpha,"Kaydon Corp Not Particularly Sexy but Definitely Worth Picking Up," 8/15/07
10. ↑ Seeking Alpha, "Wind Factor Makes Kaydon Corp a Buy on Recent Drop," 11/1/07
11. ↑ Investopedia, "Americas Wind Power Winners," 06/23/08
12. ↑ New York Times, "Move Over, Oil, There’s Money in Texas Wind," 02/23/08
13. ↑ Seeking Alpha, "Kaydon Corp. Remains a Compelling Long-Term Opportunity," 2/25/08
14. ↑ New York Times, "Move Over, Oil, There’s Money in Texas Wind," 02/23/08
15. ↑ KDN 2007 10-k, Item 1: Business, page 5
16. ↑ Seeking Alpha,"Kaydon Corp Not Particularly Sexy but Definitely Worth Picking Up," 8/15/07
17. ↑ Yahoo! Finance, Machine Tools & Accessories Leaders & Laggards
18. ↑ Seeking Alpha, "Kaydon Corp Not Particularly Sexy but Definitely Worth Picking Up," 08/15/07
19. ↑ Seeking Alpha, "Kaydon Corporation F1Q08 Earnings Call Transcript," 4/28/08
20. ↑ Seeking Alpha, "Wind Factor Makes Kaydon Corp a Buy on Recent Drop," 11/1/07
21. ↑ World Watch, "China's Wind Energy Potential Appears Vast"
22. ↑ Timken Company website, "Corporate Overview"]
23. ↑ KMT 2007 10-k, Item 6- Selected Financial Data, page 11
24. ↑ Stanley Works website, "Businesses"
25. ↑ Yahoo! Finance: CIX
26. ↑ Yahoo! Finance: Machine Tools and Accessories Leaders and Laggards
27. ↑ Yahoo! Finance: Machine Tools and Accessories Leaders and Laggards
28. ↑ KDN 2007 10-k, Item 6: Selected Financial Data, page 9
29. ↑ TKR 2007 10-k, Item 6: Selected Financial Data, page 18
30. ↑ THMD 2007 10-k, Item 6: Selected Financial Data, page 18
31. ↑ CIX 2007 10-k, Item 6: Selected Financial Data, page 15
32. ↑ HDNG 2007 10-k, Item 6: Selected Financial Data, page 21
33. ↑ ROLL 2007 10-k, Item 6: Selected Financial Data, page 18
34. ↑ NNBR 2007 10-k, Item 6: Selected Financial Data, page 17
35. ↑ KMT 2007 10-k, Item 6- Selected Financial Data, page 11
36. ↑ SWK 2007 10-k, Item 6: Selected Financial Data, page 14