Kaydon disappoints, for now, but watch how the wind blows

From Times staff writer Edward Silver, who follows green-investing trends:

Kaydon Corp.’s wind-power business fanned interest in its shares this spring. But like some other companies with green in their mix, the firm's mainstream businesses now are putting a brake on growth. And that has taken a blade to the stock price.

Tagged as an industrial components maker, Kaydon owns half the U.S. market for ball bearings that allow wind turbines to cut the air with high power and low friction.

The Ann Arbor, Mich., company’s second-quarter results, reported Tuesday, made clear that the wind build-out still is in full swing. Kaydon said wind-power sales are likely to top $90 million this year, almost triple the haul in 2007.

Unfortunately, that segment is a fraction of Kaydon’s total sales -- only about 7% at the start of the year, although that’s likely to double by year’s end. Between now and then, however, Kaydon expects tepid returns in its mainstream markets --aerospace and electronics among them -- and funding delays in, of all things, its military contracts. And the high price of steel is creating stress on the cost side.

Although second-quarter profit of 64 cents a share, on sales of $140 million, nosed ahead of forecasts, investors focused on the outlook. The shares dived $7.64, or 13.7%, to $48.31 after the report Tuesday, wiping out the last of their year-to-date gain. They eased further on Wednesday, to $48.24.

Wind has hit the energy landscape this year like a bracing squamish. T. Boone Pickens, once identified solely with oil, has had a notable influence, throwing billions of dollars at a massive turbine project in Texas and proselytizing politicians.

But stymied investors know that wind pure plays are scarce in the U.S. Firms raising wind units can’t escape outsize costs for materials and cooling demand in their traditional lines. General Electric Co. is the poster child for the problem: Its windmill business is No. 2 worldwide to Denmark’s Vestas, but that hasn’t made up for GE’s woes in other areas, such as home appliances.

Up to now, Kaydon has been known for strong profit margins, reflected in the stock's lofty price-earnings ratio of around 20 based on 2008 estimates. Those margins may wilt some in the second half. Yet the company now boasts its biggest order backlog ever -- stuffed, of course, with wind deals.

Other positives include cash of $8 a share on the balance sheet and a rising dividend.

The longer-term bull case, though, is mostly about the company’s positioning in renewables. As foreign windmill giants invade U.S. territory, looking for domestic suppliers, they know where to find Kaydon.

Photo: Wind turbines near Palm Springs. Mark Boster/Los Angeles Times

Comments

[Robert NO longer in LA]

Wind farms are more of a TAX DODGE than energy generation; drive past some and you WILL note, many aren't doing anything but generating false tax write-offs, FULL TIME.

[mike]

Look at how much power China produces from wind, yes prehaps some are using this as a write off but that makes no sence, it cost alot of money for a little tax write off. No Money is the bottom line here and thats the focus not skirting something.

[martscan]

It is a common misconception of the intellectually unwashed that 'tax dodges' are schemes to create 'false tax write-offs'.

For openers, the "vehicle", process, product, system, etc., has to provide a needed, viable benefit to society that is inherently risky. Ethanol is an example. Furthermore, the presumed 'benefit', can only be developed and obtained by use of large amounts of capital. Recognizing this, Congress approves extraordinary incentives to facilitate raising the capital...thus the tax credits and 'write-offs'. What critics of the 'write-offs' don't understand, or fail to consider, is that someone HAS to put their money up front to get a 'write-off', which in most cases is a deduction...and deductions are not credits and only partially allay the risk of the investment. And, should the initial "scheme" prove to be beneficial to everyone, ironically, it is the critics, who invested nor risked a dime, that have the higher return...in the critics case, their ROI is ad infinitum.