Kaman Insiders Buy, but It Looks Rich

 | Jun 19, 2013 | 10:00 AM EDT  | Comments
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A Form 4 filed with the Securities and Exchange Commission has disclosed that Neal Keating, the CEO and chairman of the board of directors at Kaman (KAMN), purchased 2,500 shares of the company's stock on June 17 at an average price of $32.59 per share. Keating has been a frequent buyer of the aerospace and industrial component company's stock so far this year, and he has now purchased more than 11,000 shares since the beginning of March at prices generally between $32 and $35.

We track insider purchases because studies show that, on average, stocks bought by insiders narrowly outperform the market. We believe that this is because insiders have to be more confident in the company than usual in order to buy, rather than diversifying their wealth. We'd note that two additional company officers were buying the stock in May. Studies indicate that these consensus insider purchases are somewhat more bullish signals.

Kaman's revenue was essentially unchanged last quarter from the first quarter of 2012. Because selling, general and administrative expenses increased significantly, Kaman experienced a 24% decline in its earnings. The culprit for this drop was considerably lower operating margins in the distribution business, which distributes industrial products such as power transmission and motion control devices. While revenue from that segment rose slightly (and came out to about two-thirds of total sales), operating income declined.

The aerospace segment only somewhat offset this decline with an increase in its own operating income. We'd note that the adjusted EPS results came in somewhat below analysts' consensus estimate.

At its current market capitalization of about $880 million, Kaman trades at 17x its trailing earnings. And since 90,000 shares trade on average per day, at a current price of over $32, we'd say there is plenty of daily dollar volume for most investors.

Analysts' expectations are for $2.28 in earnings per share for 2013. In the first quarter, Kaman reported $0.26 cents in EPS, so the current estimate suggests considerable improvement over the rest of the year. If the company hits its targets, that would make for a current-year P/E multiple of 14. The sell side continues to expect improvements on the bottom line beyond that point, with a forward P/E of 12 and a five-year price/earnings-to-growth ratio slightly below 1. We'd be a bit more cautious, considering Kaman's recent performance, although we do see multiple insiders with enough confidence in the company to buy the stock.

The closest peer for Kaman is probably the $3.1 billion market cap Spirit AeroSystems Holdings (SPR), which provides aerospace components. Spirit has actually been doing well recently: In the first quarter of 2013, it recorded double-digit growth rates in both revenue and earnings from a year earlier. If we annualize the first-quarter adjusted earnings numbers, we get a P/E multiple of 9 on a trailing basis, essentially in line with what the sell side is forecasting for this year and next year.

We wouldn't want to jump to conclusions, but if we take the most recent results to be a better indicators of Spirit's current business conditions than the trailing numbers, it would appear that that company is trading at a lower valuation and is considerably healthier in terms of revenue and earnings. It seems more worthy of further research than Kaman does, even considering the insider purchases at Kaman.

Of course, to some degree these insider purchases could reflect general positivity on the industry. Kaman itself doesn't necessarily look too overvalued, and we would recommend against shorting the stock as well, but we'd at least want to wait until its financial performance is stronger than that of Spirit before choosing to buy the stock at a higher earnings multiple than its peer.

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