The message below and the following discussion was posted at http://www.11wall.com and might be of interest here. 11Wall is a moderated discussion board. As such it has no spam or flame wars and is generally civil and thoughtful. You might visit if postings like this interest you, whether you agree with them or not. I don't read here, so please post any responses at 11Wall. ****************************************** Heads-up: KABThe Wall Board: Stocks (Misc): STOCKS NOT OTHERWISE LISTED: Heads-up: KAB By Igodard on Sunday, December 5, 1999 - 11:07 am:Kaneb Services (KAB-NYSE) is a corporate hodge-podge with a number of interesting points.Business units: 1) Operates and 1/3 owns a pipeline and the 3rd largest US tank farm system 2) Provides industrial services to process industries like refineries and power plants 3) Provides information services to government and financial institutions. 4) Wholesales fuel in the Western US. This mess is growing earnings at 20-25%/year with a PE of 9. The pipeline is a solid, very heavily leveraged cash cow. 2/3rds of it is owned by a LP(KPP-NYSE) which with an 11% coupon looks to be worth a look in its own right for anybodywho wants tax-advantaged income. The MLP lets KAB skim the cream off earnings growth,and they have been growing by acquisition of tank farms and look to continue with more.There is a lawsuit with environmental overhang, but I judge the size is small enough and farenough out that it doesn't matter. The industrial services operates world-wide with a heavy concentration in disaster work(blown holes in pipelines, that kind of thing). Sales are down sharply. In response they shed30% of the crew over the last year, but are still profitable even after heavy severance. I thinkmost of the downturn was the well known problems in the oil patch, which looks to be turningaround. Still, this is the weakest segment. Information services sales and earnings are doubling annually. This is a typical VAR/SIhouse with some vertical niches. They have done some acquisitions without any apparentproblems. Still a small unit, but terrific margins and growth. The wholesale fuel business is the newest division. It has paper-thin margins but makes goodmoney. The synergy with the pipeline/tank farm business is excellent (distribution areasoverlap). Probably won't grow much (except with buyouts) but helps the cash cow. I am impressed with the management. It seems a tight shop; they have handled theacquisitions well; they bit the bullet on the downturn in industrial services and downsizedlong before the unit was a drain; and the CEO has a novel deal with a special preferred issuewhich pays only on the _increase_ of EPS, not market price like the usual options. In short, they have the cash, the management, and the incentive to continue growing bothtop and bottom lines. KAB is made to order for tracking stocks - split the info unit out andgive it a 40 PE (well justified by the growth rate) and it adds $10/share to a $4 stock. Inessence, KAB is a high tech company sitting on top of a profitable cash cow that's doingpretty good in its own right. The chart shows a strong pattern of trading range cycling in a 4-1/4 to 5 range, narrowing.Right now it's at the bottom of the range. At a guess I'd expect a couple of more cycles(maybe 3/4 point profit available from trading each cycle) and then a breakout say around inFeb-March. It certainly could cycle sideways for much longer than that though. With the earnings protection provided by the utility-like pipeline/tank farm ops, there seemsto be no downside company risk. The downside market risk appears only if interest rates riseenough (or the whole market crashes enough) to drive industrial PEs down sharply. But thatwould require double-digit rates, not likely within the horizon of this position. I plan to buy now, trade the cycles so long as volume stays down (accumulating at thebottoms), and wait for a breakout. If all goes well I'll be holding at an average improvedprice of $2.50 when it breaks $5 heading for $8-12. I may also try to put a flea in management's ear regarding the tracking stock - if TC doesn'tdo it first :-). This is only a summary - DYODD. Disclosure: Accumulating, trading for price improvement Ivan
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