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Author: bootchk Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 361  
Subject: a valuation exercise Date: 10/5/2000 2:48 PM
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Why did KEM sales jump this year? What is a good valuation for the stock? This post runs through some reported numbers to make sure they hang together.

From the KEM June 00 10-Q SEC quarterly report: "Net sales for the three months ended June 30, 2000, increased 102% to $329.1 million from $162.6 million for the three months ended June 30, 1999. The increase in net sales resulted from higher unit volume and increased selling prices in both tantalum and ceramic capacitors."
But how much was price increase and how much was unit increase? I wish they would say, so we needn't finagle as follows. Their gross margin was 48% (not the 31% I mistakenly posted earlier) (which is near the 50% goal of a rule maker). It is widely reported that capacitor prices are up 20-30%. If you subtract 25 from 48, you get 25, which is nearer the GM for KEM for June quarter 1999, which I will assume was an average, typical year (not down, not up in the cycle.)

Now for the June quarter, remove the extra revenue from price increases, with a goal of determing the growth in unit sales. To $169M cost of goods sold, add a third, representing the typical 25% GM. This yields $226M, which is 40% greater than year earlier revenue. This 40% unit sales growth roughly agrees with the 34% reported by the president in the annual report issued in Mar 00.

In other words, KEM had an extraordinary first quarter because unit sales increased roughly 40% and prices increased roughly 25%.

My whole point in this exercise is that I think the growth in unit sales should be used as a conservative growth rate of KEM, not the growth in sales, since the recent price increases might not stick once industry factory capacity is adjusted. In fact, if too many factories are built, prices may fall 4-8% per year, as reported by the CFO Christiansen of AVX in a recent IBD article. And if there is another economic crisis, unit sales could also decrease.

But, assume that 1999 prices were average and unit sales will grow by 30-40% a year. Plug last years $76M earnings and growth of 30% into the Quicken implicit value calculator, which calculates the present value of the KEM future earnings. You get a value of $75 a share. Any prices increases are gravy, any short falls in unit sales growth we're toast.

Now I should check that they are building enough new factories to sustain that unit growth...

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