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April 05, 2008 – Comments (0) | RELATED TICKERS: GHM , RPM

Reposting recent updates to my pitches.

Graham Corp (GHM)

On Thursday 3 April, GHM announced record quarterly orders and increased revenue guidance for FY2009. The stock jumped from 36.90 at the open to close at 45.22. On Friday, it tacked on another three and a half plus to close at 48.79. Even after the run up, it’s still only trading at a ttm PE of 17.8. Yahoo Finance shows only one analyst covering the company, that earnings estimate for next year puts the fwd PE at 15.4 and I suspect that estimate will go up based on the company’s new revenue guidance. Management has absolutely blown the earnings estimates away the last two quarters.

I see several potential catalysts to drive this stock price higher. With the market cap approaching $250 million, they’re getting to the point where they could pick up more analyst coverage and are big enough for bigger mutual funds and institutional investors to start looking at them. TTM EBITDA is 10.7, but with higher revenue projections bringing that down a bit, they could be attractive as a buyout.

The primary risk is that this is a cyclical growth story, so a bad quarter or falloff in the petrochemical business would be pretty ugly for GHM. Steel costs could be a problem for them, but with very strong customer markets, I believe they shouldn’t have much trouble passing price hikes along.

The stock still looks like a good buy, even after the run up last week. But, with market volatility, I would look for a pull back before buying. In this market, patience is nearly always rewarded with a better buy point. With the company forecasting 15-20% revenue growth for FY09 and a track record of crushing estimates, I don’t see any reason they shouldn’t trade at a fwd PE of 20+. That would put the stock price well into the 60’s.

RPM International

RPM reported earnings on Thursday 3 April, beating estimates and providing a slight increase to guidance going forward. Revenue and earnings growth projections were raised from 8-10% to 10-12%. I believe RPM’s stock price is held in check by perceptions that its tied to the residential building cycle. However, in the annual report issued last fall, the CEO stated that less than 10% of their business is tied to housing construction.

In the earnings report, the company indicated they’ve recovered from a slow start to the quarter and are seeing strong sales to petrochemical, marine, offshore oil and related industries.

RPM has a history of making relatively small acquisitions to build the business and the current market combination of low interest rates / tougher credit for buyers and private equity looking to sell off assets to raise cash is opening up opportunities for them. The company’s track record on these deals is quite good; they’re normally accretive to earnings within a year if not immediately. During the conference call, they mentioned an $80 million dollar deal in Europe that will be slightly dilutive this year but accretive in 2009. They couldn’t announce the name or details since the deal is pending, but will provide that information at an analyst meeting in July. They’ll also sell when the price is right; last quarter they sold Bondo to 3M.

RPM has a diverse mix of products and markets, selling in the US and worldwide markets. The broad base makes it very unlikely that everything will be in the tank at the same time and provides a pretty steady overall business.

Risks include rising raw materials costs, although in the conference call they said they’re now seeing a mixed picture in materials costs with some even declining slightly. RPM also has some exposure to asbestos litigation; they do have reserves set aside.

RPM pays a nice dividend, current yield is 3.3%, and they have a long track record of hiking the payout every year. Based on last fall’s annual report, I’m expecting annual dividend increases of 8-10% over the next several years.

The stock price is probably pretty close to fairly valued at the Friday, 4 April close – I think upside is 10-15% and downside maybe a little less. Yahoo shows a consensus target estimate of 25.75, which sounds about right. Of course, you also get the nice quarterly payout. This is one of the stocks that make me wonder why anyone would buy a 10-year treasury at 3.5% or so when you could own a solid, well-run company like this with nearly the same initial payout, but good prospects for increases.

Disclosure:  I own shares of both GHM and RPM

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