Long Shot: A Microcap with Mega Yield

 | Mar 27, 2012 | 11:41 AM EDT
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

High-quality dividends are usually associated with large stable enterprises with a long history of operating performance.

But not-so-large, industrial contractor KSW (KSW) has a long operating history, tons of cash and a juicy yield. All these attractive features come packaged in a $25 million microcap that could also be set to deliver some especially attractive gains in the future.

Based out of Long Island, NY KSW's roots trace back to the 1970s. Since then, the company has become a growing supplier and installer of heating, ventilating and air conditioning (HVAC) systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects, primarily in the New York City private construction market. While exposure to one geographic region may be a concern, New York City is one of the largest cities in the world and offers plenty of growth opportunity for a company like KSW.

KSW serves hotels, the government, transportation, hotels, residential and commercial markets. Whether it's a $500,000 remodel project or a $10 million high-rise new system project, KSW covers it. In December, the company picked up two new projects worth $22 million from a community college and a Manhattan condo project. With these two new projects, the company's backlog stands at nearly $90 million.

As of Sept. 30, 2011, the most recent balance sheet data available, KSW had $18 million in cash and marketable securities on the balance sheet. The company is debt free with $19 million in total liabilities, made up mostly of payables. While the company has yet to release a 10-K, for the year ended Dec. 31, 2011, KSW reported net income of 24 cents a share. That figure is a decline from EPS of 31 cents in 2010, but as of year-end 2011, backlog stood at $86 million compared with $64 million in the year-ago period.

With a current enterprise value of less than $9 million, KSW is trading at less than 6x EV to earnings. The company is returning cash back to shareholders in the form of a nearly 4% annual dividend yield. With $18 million in cash and annual dividend expense of $1.2 million, the payout is not going anywhere. I should note that KSW's dividend payout in 2011 is about 25% higher than the 2010 payout.

The closest pure play comparison is Texas-based Comfort Systems (FIX), a $400 million company that dwarfs KSW. While it might not be appropriate to do a relative comparison given the vast difference in size between the two, Comfort trades at 13x EV/EBITDA while KSW fetches a comparable multiple of less than 4x. KSW's dividend of 3.9% is more than double that paid by Comfort Systems. I can only surmise that the valuation gap is a result of the difference in exposure that a $25 million company receives compared with a $400 million company.

KSW is a cash-rich, profitable gem that is paying investors nearly 4% for good things to come. With the economy on the mend and New York City's continued growth, KSW's market opportunities remain robust. A long shot by name only, KSW actually appears more like a juicy dividend play with an option for significant upside over the next year or two.


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