I had KMGB in a research note....
I sent this to my readers on 5/17 when KMGB was $14.27. It was a research note on two ways to play the rails. PRPX was the other name mentioned in the note....
Here it is ...
~~~PASTE FROM 5/17~~~
[05/17/2007] All Aboard the Rails with Buffett and Icahn...
01:03:51am
2007-05-17
'Tis the season for money managers of all shapes and sizes to release their SEC 13F filings detaling their holdings for the first quarter. There are only a handful of investors in the World who move markets and sectors within the markets when their filings show a preference for a particular industry. Carl Icahn and Warren Buffett are of course firmly seated in said 'handful'.
What do the filings of these two investing guru's have in common? Railroads. Yep, perhaps one of the most boring, un-sexy, dirty sectors of the market has caught the eye of these two mavens. If it were anyone other than these two placing multi-billion dollar bets on rail, pundits would argue that rail is a terrible place to be in a slowing economy as rail is perhaps one of the most economy sensitive sectors in the market. They would also argue that with record fuel prices, margins will be squeezed. Margin pressure and reduced freight loads as our slower economy imports fewer goods from the Far East, don't make for a wise investment thesis the so-called experts would argue.
Let's be clear though, 'so-called' experts are trumped every time by anyone with the last name Icahn or Buffett. Now that their cards are on the table, pundits and market participants buy first and ask questions later. Not surprisingly, the value oriented Buffett sees some very healthy trends for the rail industry even in an economy that's growing below trend...
~~~PASTE~~~
May 16 (Bloomberg) -- Billionaire Carl Icahn bought a $122 million stake in CSX Corp., joining Warren Buffett and TCI Fund Management LLP in purchasing railroad shares.
Icahn held 2.68 million shares of Jacksonville, Florida- based CSX, the third-largest U.S. railroad, as of March 31, according to filings yesterday with the U.S. Securities and Exchange Commission. Buffett's Berkshire Hathaway Inc. and hedge fund TCI also detailed their purchases in the industry, which they disclosed in the past month.
``The rail group has attracted a lot of attention in a year and a half that could've led to a lot of smart people looking into it,'' Tony Hatch, an independent rail analyst based in New York, said yesterday in an interview. ``This group has clearly changed in many ways and has been stronger about talking about how it's changed.''
CSX and companies such as Union Pacific Corp. and Burlington Northern Sante Fe Corp. are benefiting from a tightening in rail capacity starting in 2003 and rising Asian import volume, Hatch said. Buffett, Berkshire Hathaway's chairman, said earlier this month that higher fuel prices and deregulation are making rail carriers attractive investments.
``As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors -- truckers -- roughly by a factor of four,'' Buffett, 76, said at the company's May 5 annual meeting in Omaha, Nebraska.
~~~END PASTE~~~
Buffett summed up the fuel price angle highlighting that the truckers are much more sensitive to high diesel prices than the rails are. What this snippet didn't mention was that many of the rails have actually been able to recoup their fuel costs and then some by implementing aggressive fuel surcharge programs. So aggressive in fact that Congress actually looked into the matter late last year, but took no action other than to 'warn' the rail operators not to engage in such practices. Sure, that will work... (wink, wink).
Since it's not my job to highlight mega cap rails with single share prices that are several times more than I have in my wallet right now (my wife gave me a $10 to start the week and I still have $4 left...thank god for the value menu at McD's!) I thought I'd touch on a couple names that should see not only an increase in investor interest, but a healthy uptick in demand from the rail operators that are flush with cash and profits.
Portec Rail Products (PRPX) $11.71
Portec manufactures, supplies and distributes a range of railroad products, including rail joints, rail anchors, rail spikes, railway friction management products, railway wayside data collection and data management systems and freight car securement systems. They operate through four distinct segments...
Railway Maintenance Products Division (RMP)
The Railway Maintenance Products division offers track component and friction management products and services to railroads, transit systems, and railroad contractors; and wayside detection and operating asset data management systems. This segment offers products, such as standard and insulated rail joints, gauge plates, track mats, curve blocks, and jacking systems, as well as distributes and resells purchased track components and lubricants manufactured by third parties.
Shipping Systems Division (SSD)
The Company's SSD business segment engineers and sells load securement systems to the railroad industry. These systems secure a variety of products and lading onto freight cars. Most of the assembly work for SSD is performed at RMP's Huntington, West Virginia manufacturing plant, although some manufacturing is subcontracted to independent third parties.
Portec Rail Nova Scotia Company
Operationally in Montreal, Canada the Company produces rail anchors and rail spikes at its manufacturing plant in St. Jean, Quebec, primarily for the Canadian railroads, with some products exported to the United States and for other international customers. Rail anchors and rail spikes are devices used to secure rails to ties to restrain the movement of the rail tracks.
Portec Rail Products (UK) Ltd
In the UK, PRPX operates and serves its customers in two different markets. In the rail market, the Company's product lines include friction management products and services and track component products. Prior to December 2006, it produced railway lubrication products at its Wrexham, Wales location. As a result of a business restructuring during 2006, the Company closed the Wrexham, Wales location and moved the rail operations to Sheffield, England. It has recently sold the Wrexham property for $2million. During 2006, the Company announced a business reorganization plan, which consolidated its rail and material handling operations in the United Kingdom from four locations into two, one at the Company's Sheffield, England facility (rail) and the other at its Leicester, England facility (material handling).
As railroads build out thousands of miles of new track to handle the additional capacity they expect while taking share from truckers, PRPX looks well positioned to benefit with their track components. Relative to the rest of the sector, the stock is pretty cheap here. PRPX is trading at just over 1x sales and 2x book compared to it's peers in the rail industry that trade at over 2x sales and nearly 3x book value.
PRPX earned $.48/share fully taxed last year and started 2007 off with an EPS of $.13/share besting Q1'06 by $.02. Revenues were up 18% year over year but the EPS was impacted by $.04/share of non-recurring costs related to the sale of the Wrexham location and SOX compliance. With a forward P/E of around 20 and a $.24/year dividend as a bonus, PRPX should print new highs as the railroad renaissance plays out this summer.
The other name I'm going to discuss in our railroad spotlight is a bit more obtuse in it's relationship to the rail industry....
KMG Chemicals (KMGB) $14.27
How many different industries can you play in one stock? Let's see....
Agricultural chemicals (fertilizer) ... one of the hottest spaces in the market
Hurricane Play ... a sector that will heat up and pop if we have an active storm season
Animal Health ... beef prices are escalating as feed prices soar...need to keep those cattle healthy
Railroad Maintenance ... rail operators building out new freight capacity and adding/repairing track
Believe it or not, all of those angles are present in little known KMGB. Here's the business description...
~~~PASTE~~~
KMG Chemicals, Inc. manufactures, formulates and globally distributes specialty chemicals. The Company operates through purchasing product lines and acquiring companies that operate in the segment of the specialty chemical segment. The Company is involved principally in the manufacture and sale of specialty chemicals in niche markets through its wholly owned subsidiary, KMG-Bernuth, Inc. It sells the wood preserving chemicals, pentachlorophenol (penta) and creosote, to industrial customers who use these preservatives primarily to extend the useful life of utility poles and railroad crossties. Its agrochemicals include animal health pesticides and agricultural chemicals. The animal health pesticides are used on cattle, swine and poultry to protect these animals from flies and other pests. The agricultural chemicals include an herbicide used primarily for weed control in cotton and sugarcane fields and along highways. Sales made to customers in the United States were 97% of total revenues during the fiscal year ended July 31, 2006
~~~END PASTE~~~
That one paragraph covered all the industries KMGB sells into. Evidently, these are nice places to operate right now because KMGB just blew the doors off of any fiscal Q2 estimates anyone may have had for them...
~~~PASTE~~~
Second Quarter 2007 Highlights - versus second quarter of fiscal 2006
Net sales increased 25% to $19.5 million.
Net income more than doubled to $1.5 million or $0.13 per diluted share. Net earnings per diluted share was calculated on 20% more shares outstanding due to the issuance of 1.7 million shares in July of 2006 through a public offering.
First Half Financial Highlights - versus first half of fiscal 2006
Net sales increased 23% to $36.7 million.
Net income increased 116% to $3.0 million or $0.27 per diluted share. Net earnings per diluted share was calculated on 20% more shares outstanding due to the issuance of 1.7 million shares in July of 2006 through a public offering.
"Our solid results for the quarter were driven by strong results in our wood treating segments, as utilities and railroads continued maintenance on their infrastructures at a brisk pace, as well as greater contribution from our Animal Health business. Creosote sales increased 33% to $10.7 million during the second quarter over the previous year. Penta revenues were $6.2 million, versus $6.9 million in the second quarter of last year, due to greater than usual purchases by utilities during the 2006 period in the aftermath of Hurricane Katrina. We believe wood treating demand will continue to be strong for the balance of fiscal 2007. However, demand for creosote treated railroad ties has been at the very top of its historical range through 2007, and we believe that it will likely soften at some point in the future."
~~~END PASTE~~~
My guess is that the railroad tie business will remain at the top of its historical range for quite some time. Increased load factors are putting more stress everyday on an aging rail system in dire need of upgrade and maintenance. Remember too that an active hurricane season will positively impact KMGB also as utilities scramble for penta treated poles to restore power.
Management is also guiding for huge increases in revenue from their new livestock insecticide ear tag...
~~~PASTE~~~
Neal Butler, KMG's President and COO, stated "Our 2007 Ear Tag Marketing Program has been very successful with participation by 100% of our distributors. We are beginning to see follow-up orders as early shipments move to the field. We anticipate that AVENGER will become the leading insecticidal ear tag in this, its first year of introduction, and that revenues in our Animal Health segment will exceed $15 million for fiscal 2007, up from $8.7 million last year." Butler continued, "It is important to keep in mind that our Animal Health sales are seasonally weighted to the second half of our fiscal year. We have been building inventory and receivables associated with this segment of our business, and will continue to do so until our fourth fiscal quarter when payments are due and those receivables convert to cash."
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