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XMFSinchiruna (27.14)

Kaiser is the Wiser Miser

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February 22, 2008 – Comments (0) | RELATED TICKERS: CENX , AA , ACH

If I were to tell you of an aluminum company that was firing on all cylinders, paying down debt and increasing production capacity while recording record profits, you’d assume I was talking about a foreign company… would you not?  With a name like Kaiser Aluminum (NYSE: KALU), I’d understand if you thought it was German.  Surprise… Kaiser Aluminum is ‘Made in the USA’, in the great state of KALUfornia.     

At a time when expectations for growth among investors in U.S. companies are trending lower amid mounting concerns over the health of the domestic economy, what kind of company can double its profits and surprise analysts by a 30% margin?  Two factors are at play here. 

For one, Kaiser manufactures specialty aluminum products which are in very high demand for defense and aerospace applications.  Full-year operating income for these products rose nearly 40% from $122 million in 2006 to $169 million on 2007.  With robust demand for a product called ‘heat treat’, which is extremely strong and used for armored plating, aircraft fuselages, etc., the company has boosted output and raised its prices simultaneously.

Second, Kaiser has been extremely frugal with their assets.  For a company that just emerged from Chapter 11 bankruptcy in early 2006, its balance sheet is truly impressive.  In December, the company announced it had used cash on hand to pay down the entirety of its funded debt of $50 million, while increasing liquidity with a revolving credit facility totaling $265 million.  Kaiser is also in the midst of a $244 million capital expenditure program for organic growth, including a $139 million investment to increase production capacity for those high-demand heat treat plates.

Despite these strengths, Kaiser’s shares have lagged behind those of most major competitors over the last year, among them Alcoa (NYSE: AA), Century Aluminum (NASDAQ: CENX), and the Aluminum Corporation of China (NYSE: ACH).

Going forward, Kaiser might not remain as insulated from a deteriorating domestic economy as it has to date, since demand for many consumer-driven specialty products is likely to wane.  Nonetheless, management has displayed fiscal conservatism by employing current profits to eliminate debt, procure liquidity, and invest in the company’s infrastructure to increase efficiency and capacity.  In this fool’s view, these are the marks of a company that is poised to weather a storm.

 

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