A Member of Pat McKeough’s Inner Circle recently asked for his advice on Kadant Inc., a global leader in engineered equipment and systems for papermaking, wood processing, and fluid control.
Pat likes the firm’s impressive operational execution, steady sales and profit growth and successful integration of strategic acquisitions that expand its capabilities. However, he cautions that the stock appears overvalued with a P/E ratio of 38.8 implying more growth than appears realistic at this time.
KADANT INC. (Symbol KAI on New York) provides process and engineering equipment for papermaking, recycling, lumber manufacturing, and related industries. It has three operating segments: Flow Control (35% of revenue), Industrial Processing (43%), and Material Handling (22%). The company has over 3,400 employees in 20 countries.
Kadant was initially founded in 1991 as Thermo Fibrotek, a subsidiary of Thermo Electron, which today is known as Thermo Fisher Scientific (symbol TMO on New York). In 1996, Thermo Fisher partially spun out Thermo Fibrotek, and subsequently completed a full separation in 2001. It’s been known as Kadant ever since.
On January 2, 2024, Kadant completed its $156 million acquisition of Key Knife Inc., an Oregon-based provider of engineered systems for custom chipping, planing, and flaking solutions for wood product industries. Key Knife’s products aim to improve product quality while reducing a customer’s operating costs. Key Knife’s revenues for the 12 months ended September 30, 2023, were $65 million. It will operate as part of Kadant’s industrial processing segment.
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On June 3, 2024, Kadant announced it had completed its $55 million acquisition of Dynamic Sealing Technologies LLC. That firm is a Minnesota-based provider of engineered fluid sealing and transfer solutions for rotating applications. Dynamic Sealing specializes in value-added products used to transfer hydraulic fluid, water, air, and other liquids and gases in various industrial processes.
The company generated $25 million in revenue over the last year. It employs 90 people and will operate within Kadant’s Flow Control segment.
Kadant Inc: Revenue and earnings both rise in the most recent quarter
In the three months ended September 28, 2024, Kadant’s revenue rose 11.3% to $271.6 million from $244.2 million. The increase was primarily due to recent acquisitions, along with record aftermarket parts revenue and strong demand in North America.
Excluding one-time items, the company’s earnings rose 5.9%, to $33.4 million, or $2.84 a share, from $31.6 million, or $2.69.
All in all, the acquisitions of Key Knife and Dynamic Sealing Technologies should be good fits for Kadant. Plus, overall demand for Kadant’s services should keep growing as the need for packaging materials made from recycled paper continues to offset falling demand for traditional
printing and writing paper due to the rise of digital media.
Meanwhile, the stock trades at a high 38.8 times the $9.63 a share it’s forecast to make in 2025.
Recommendation in Pat’s Inner Circle: Kadant Inc. is okay to hold.
