# Kaman Corporation Inc (KAMN) Investment Valuation

August 2nd, 2012 Posted by No Comment yet

Kaman Corporation Inc (KAMN)  value investing approach model is prepared in a very simple and easy way to value a company.

## Kaman Value Investing Approach

This value investing approach adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, In other words, the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. First of all, the basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculate first the enterprise value as our first step. I believed this is more applicable because it measures the total value of the company.

## Kaman Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. In other words, Enterprise Value EV) is the present value of the entire company.  While market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Formula:  Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short  Term Investment)

Total Debt = Short Term Debt + Long Term Debt

#### Explanation

The buying price for the entire company of Kaman was \$1034, inclusive of total debt minus cash and cash equivalent at \$40 per share. Market capitalization has up and down trend by 49, 29, 27, -5 and 14 percent from 2008 to 2012 trailing twelve months (TTM). While enterprise value shows a decreased by -35 percent in 2008 and from 2009 to 2012 TTM it shows an increased by 17, 42, 1 and 13 percent, respectively. In addition, the price per share for market capitalization and enterprise value can be seen in the table above.

Moreover, buying the entire company is also paying for the total debt of the company. The net of total debt and cash added was 27 percent average and 15 percent in 2012 TTM. Likewise, the distribution of the buying price would be as follows:

 Average Operating assets 100% Equity 85%+ Total debt (net) 15% ttm 2012 Operating assets 100% Equity 73% + Total debt (net) 27%

Buying the company, you pay 73 percent of the equity and 27 percent of total debt (net of cash) of the company in the trailing twelve months. This is how the whole buying price will be distributed.

We are through with enterprise value. Let us now move on with Benjamin Graham’s Stock Test. There are several sub-categories on this topic.

## Benjamin Graham’s Stock Test

### Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

### Net Current Asset Value (NCAV) Method

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically two-thirds or 66 percent of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s. To get the result, we use this formula:

Net Current Asset Value = Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

#### Explanation

Net current asset value was computed by deducting total liabilities to total assets and divide it by the number of shares outstanding, the result is NCAVPS. The 66 percent of it was compared to the price per share. Graham would buy stocks if the price is lower than the 66 percent by at least 40 percent to 50 percent. In the above table it shows that the price was higher than the computed 66 percent, therefore, it indicates the price was overvalued by 71 percent.

The stocks of Kaman Corporation are not advisable for buying considering the NCAVPS valuation because the price was expensive as per the NCAV approach.

### Market Value/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to NCAV. If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

The table above shows that ratio exceeds the 1.2 ratios, therefore indicating that the price is overvalued and did not pass Graham’s stock test. The price was not advisable for making the investment at this period. The average ratio of 2.32 doubled the 1.2 minimal, indicating that the price was 194 percent above the minimum.

### Benjamin Graham’s Margin of Safety

The margin of safety is used to identify the difference between company value and price. Graham called it the intrinsic value. Hence, the difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. In other words, value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

#### Explanation

As we can see in the table above, there was zero margin of safety for Kaman from 2007 to 2012. Because the price was higher than the true value of the stocks. The intrinsic value represents 59 percent average of the enterprise value.

In addition, the margin of safety represents an excess of intrinsic value over market price. Or alternately, a discount off the price below the intrinsic value of at least 40 to 50 percent is desirable.

#### Intrinsic Value

Intrinsic Value = Current Earnings x (8.5 + 2 x Expected Annual Growth Rate).

For the intrinsic value, I used the sustainable growth rate in lieu of Graham’s earning per share growth as it measures the company’s profitability.

ROE*(1-Payout Ratio/100)

#### Explanation

The sustainable growth rate for Kaman was 1.04 average, this is the growth that the company can accommodate without borrowing outside. And its return on equity was 1.65 average, this indicates how much profit the company can generate with the money invested in common stock. Hence, the ratios were trending up from 2009 to the 2012 trailing twelve months.

Moving on, in order to understand the relationship between price and value. The graph below will show us the relationship between enterprise value and the intrinsic value.

The distance between the two lines, enterprise value, and intrinsic value line was 41 percent average. Meaning the stock was trading 41  percent above its true value. Hence there was no margin of safety in buying them and it was overvalued or expensive.

## Kaman Relative Valuation Method

The relative valuation methods for valuing a stock are to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

### Price to Earnings * Earning per Share (PE*EPS) Ratio

Multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

Formula:  (PE*EPS) = Result

#### Explanation

It shows that from 2008 to 2012 TTM, the price was greater than the PE*EPS ratio. Therefore indicates an overvalued price and the price was expensive. On the other hand, during 2007, the price was lesser than the PE*EPS, meaning the price was undervalued by 61 percent and the price was cheap.

#### Price to Earnings (P/E)

P/E Ratio indicates the multiple that an investor is willing to pay for a dollar of a company’s earning. It shows the number of times a stock price is trading relative to its earnings or stock price fluctuate. On the other hand, EPS serves as an indicator of a company’s profitability. Overall, the stock price was overvalued and expensive.

### Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is its separate price and earnings in enterprise value. By dividing the enterprise value to projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).

Enterprise Value / Earning per Share = Separated Price

Enterprise Value – Separated Price = Earnings

#### Explanation

Enterprise value was separated to price and earnings. Earnings were averaging 40 percent while the price represents 60 percent average. Enterprise value represents the buying price, an investor who is buying the entire business at the costs of \$1034 at \$40 per share; he would be paying a price of \$594M plus \$440M earnings in 2012 trailing twelve months. This is the amount an investor is willing to pay.

### Enterprise Value (EV)/ Earning Before Interest, Tax, Depreciation and Amortization (EBITDA) or EV/EBITDA

This metric is used in estimating business valuation. Moreover, it compares the value of the company inclusive of debt to the actual cash earnings. It is useful for analyzing and comparing profitability between companies and industries. This metric gives us an idea of how long it would take the earnings of the company to pay off the price of buying.

Formula: Enterprise Value/ EBITDA

EBITDA = Income before Tax + Interest Expense + Depreciation/Amortization

#### Explanation

Buying the entire company will take 10 years average to cover up the costs of buying including the debt. In other words, it will take 10 times for the earnings of the company to recover the cost.

#### Conclusion

Overview, the Graham valuation, and the relative value methods show that the stocks were trading at an overvalued price. In other words, the stock price was expensive. Therefore, I recommended a SELL in the stock of Kaman.

Researched and Written by Criselda

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