Tuesday, October 20, 2009

Is KHD Humboldt Wedag the Ultimate Value Play?

Until this article at Realmoney.com, I'd never heard of KHD Humboldt Wedag (KHD). KHD owns companies that operate internationally in the industrial plant engineering and equipment supply industry, and specializes in the cement processing industries. They have a negative enterprise value meaning that cash in the bank outnumbers the market cap. This is a pretty rare situation especially considering they are basically a emerging markets play with 95% of their backlog in Russia, Eastern Europe, Asia (mainly India), and the Middle East.

Back to why this stock made my radar. They fall into the same sector as Liz Claiborne (LIZ), Terex (TEX), and Manitowoc (MTC) that we've owned this year and still own LIZ and TEX. What sector is that you ask? They are all still down roughly 80% from their recent highs and were 'blistered' alot more then deserved. The author suggests stocks deserving to be down 20%, but that dropped 80%. We're not so sure about just 20%, but even 50% would still provide for a huge gain from here. TEX for example would trade closer to $50 instead of the current $24.

Cement may not be the most glorious infrastructure material like copper, but it'll be in high demand for decades to come as Eastern Europe, India, China, and Africa look to buildout infrastructure.

One of the main reasons for the weak valuation is the concern over the very weak orders from Q2 that amounted to just 10% of the total from last year and down significantly from Q1. If anything the weak orders are an indication of the liquidity crisis that hadn't abated at the end of Q2 and hence the lack of financing for large projects that consume cement. Q3 orders and discussion about Q4 and 2010 I would imagine will be much more positive now that emerging markets are ramping back up as we heard on Monday from the Caterpillar (CAT) CEO.

KHD recently sold their coal processing operations in order to focus on the cement industry. This will bring in even more cash to the balance sheet and further lower the Enterprise Value.

According to their September presentation, 89% of cement consumption in 2010 will be in developing/emerging markets making KHD one of the best emerging market plays around. Based on their cash reserves and solid balance sheet, it's also one of the lowest risk stocks in this universe to own if we were to have a double dip recession. Especially amongst the group listed in the RealMoney.com article where the other 3 stocks are heavily indebted.

All this makes for a solid decision to invest in KHD which we've already done for the Growth Portfolio. Todays close around $10.68 provides for a good entry point trading just above the 20ema with it poised to surge above the 200ema.

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