Kemet Cheap After Near-Miss

02/10/2011 12:29 pm EST


George Putnam

Editor, The Turnaround Letter

The circuitry specialist is growing again after a near-fatal acquisition, writes George Putnam III in The Turnaround Letter.

Kemet (NYSE: KEM) was formed in 1919 by Union Carbide to acquire a metallurgy company (the name Kemet is a blend of “chemical” and “metallurgy”). It became quite successful manufacturing parts for vacuum tubes. When the transistor replaced the vacuum tube, Kemet transferred its know-how to manufacturing capacitors, which complemented transistors (and later semiconductors) in electronic circuits. It is now one of the largest makers of capacitors and similar electronic components. Management bought the company from Union Carbide in 1987, and it went public in 1992.

The company made several acquisitions in 2006 and 2007 just as the global economy was heading into a downturn. By early 2009, Kemet was on the verge of bankruptcy when it faced a large debt maturity. With the help of a private investment from a hedge fund, the company was able to restructure its debt and get back on its feet.

A Play on Electronics Boom

Because capacitors are a fundamental component of most electronic circuits, Kemet will benefit from the increasing worldwide demand for electronic products. It is a major player in three of the key capacitor sectors: tantalum, ceramic and film & electrolytic, and it has a broad and diversified product offering. The company has a strong customer base made up of many of the world’s leading electronics manufacturers, including Cisco Systems (Nasdaq: CSCO), Dell (Nasdaq: DELL), Hewlett-Packard (NYSE: HP), Nokia (NYSE: NOK), Siemens (NYSE: SI) and many others. It also has a strong foothold in many new and rapidly growing markets such as alternative energy.

The company is well diversified globally, both in terms of manufacturing locations and sales. Over the past decade it has moved much of its production to lower-cost locations such as Mexico and Asia. In addition, during the downturn in 2008-2009, Kemet completed numerous cost reduction initiatives to further improve its competitive position.

Since its near-demise in early 2009, Kemet has significantly improved its financial position. Debt has been reduced by more than 30%, and the bulk of the company’s debt now isn’t due until 2018. It has also managed to build up $117 million in cash, which should allow it to stay at the forefront of its markets.

Platinum’s Exit Strategy

Platinum Equity, the hedge fund that bailed out Kemet in early 2009, controls approximately half of the company’s equity. This is both a plus and a minus for other shareholders. On the plus side, Platinum has a significant interest in making sure that management continues to deliver value to shareholders. On the minus side, when Platinum decides to get out of some or all of its position, it could roil the market for the stock. However, it could also mean that Platinum will eventually push for a sale of the whole company.

While the stock has rebounded significantly from its lows, we think it will go up much further as worldwide demand for electronic products continues to grow. We recommend buying Kemet up to $23. [Shares traded modestly above $15 Thursday—Editor.]

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