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. ****************************************** LHO39: KAB Debt/equity...The Wall Board: Stocks (Misc): STOCKS NOT OTHERWISE LISTED: LHO39: KABDebt/equity... By Igodard on Sunday, December 5, 1999 - 05:54 pm:[ I was looking at the Yahoo profile. They list the Long Term Debt/Equity as 2.79 and theCurrent Ratio as 1.59. Is the first one not a bit high and the CR just all right?] As TC points out, they have the proceeds of the KPP units offering in the bank, most ofwhich went to pay down a lot of the debt. However, I expect that they will bring the debtback up with additional acquisitions in short order, returning the balance sheet to a moreheavily leveraged position. However, I am not concerned by a high D/E here, and in fact see the current balance sheetas more a negative than the positive light that TC sees it in. The reason why I like them leveraged is that the underlying business is essentially a utility,with almost constand demand and near monopoly pricing. Sure, there's another pipelineeast of their's, so there is some competition, but from the Rockies well out into the grain beltthey are pretty much the only game in town, and will have a 10-15% cost edge overanybody who tries to supply liquids over a more circuitous route. Likewise the tank farmshave competition, but the location and access factors ensure that they will stay pretty full,even in a major recession. Trucking stuff in is doable, but again they will always have a costedge. Utility-like businesses can and do use a much higher leverage structure - read the sheets foryour local power or water companies for examples. So long as the returns reliably exceedthe cost of capital the bottom line benefits. Utility investments are essentially an interestarbitrage play, not a business play like a manufacturing corporation. That's why they areinterest rate sensitive. In KAB's case they stand to drop $400k net in earnings for each point rise in rates. This is lowfor a utility of their size, and reflects the fact that they have lain off most of the interest raterisk onto the KPP partners - which is in part why KPP has the high coupon. In any case, thenumber is low enough that even a 70s style rate spike still leaves them profitable. I'm hoping that they will use the cash and new debt to fill in their infrastructure where theirwholesale fuel business is located, and pick up a few more tank farms internationally tospread their regional economic risk. They already have an international presence in theindustrial services division (the best in the business apparently), so adding more simply dropsthem into the existing structure without any great integration costs. The IS business hasalmost no need for cash other than acquisitions, but they should be buying there as fast asthey can integrate the pieces. Most deals offered to an IS house are stock or earnout, andwith an all-cash offer the buyer can get a much sweeter deal. Their history shows that theycan absorb fairly substantial acquisitions without a hiccup in the numbers, which is hard todo and part of why I like the management. Disclosure: accumulating Ivan
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