Just take a quick look at the calendar. The holidays are right around the corner. And that’s a great time for investors… I’ll show you why in a moment.
The holiday season is a very exciting one for consumers and retailers. New products hit the market, discount sales are everywhere, and consumers are confident in their spending. The market is always quick to pick the holiday winners and losers of the year.
This fourth quarter is shaping up to be more exciting than most.
Lots of big questions have yet to be answered. Which pad or tablet will make the biggest splash with consumers? Can Amazon’s Fire pull sales out of Apple’s pocket? Will Google’s Android operating system make further inroads into the smartphone market?
Clearly hundreds of millions of dollars hang in the balance. Successful products will propel some stocks to new heights… those unsuccessful products will push their corporate stock prices ever lower.
Companies like Apple, Intel, HP, Dell, Nokia, Cisco, and IBM are going to be selling the gadgets. But which company do you pick? How do you limit risk?
Wouldn’t it be great if you could get in on Apple’s profits without having to drop $400 for a share of APPL?
Wouldn’t it be great to sidestep the risk of an investment in HP or Dell?
I’ve uncovered a back door way to invest in the success of all of these companies… so regardless of whose product is the hottest, you have the opportunity for a win!
No, I’m not talking about some gift-wrapped holiday mutual fund. I’m talking about component manufacturers in the semiconductor industry.
The company I discovered caters to many of the tech titans. Not only does it count the world’s leading technology manufacturers in its client list, but it’s also a great small cap value stock. Allow me to introduce…
KEMET CORP
KEMET (KEM) develops and manufactures capacitors. Capacitors are a key component of almost all electric gadgets. KEM operates 23 production facilities with over 11,000 employees. They manufacture in the U.S., China, Europe, Mexico and Indonesia.
Almost every consumer and industrial electronic piece of equipment you can name has capacitors.
Smartphones, laptops, netbooks and tablets are filled with them. Before we go any further on KEMET’s business let’s get some capacitor basics out of the way.
WHAT’S A CAPACITOR?
Capacitors are passive components in a circuit. They don’t create energy like a battery does. It’s a storing device. And it’s designed to deliver energy on demand.
The simplest capacitor analogy is a water tank. For example a pump filling up the tank with water acts like a power source. The tank itself is the capacitor. As you can imagine, tanks can hold different amounts of water, and Capacitors can hold different amounts of energy.
Every tank has a release valve, and a capacitor is no different. A switch in the capacitor determines how much energy is released.
Depending on your little gadget’s needs, a little or a lot of energy can be supplied.
Capacitors come in all different shapes and sizes. Some fill up fast, others fill up slow. Some have huge storage capacities others… not so much.
Here’s the key to capacitors.
Power consumption is a huge component of modern electronics and without capacitors our technology and gadgets wouldn’t function the same way.
KEMET’s CAPACITORS
As we discussed, capacitors come in many shapes, sizes, and configurations. In fact KEMET manufactures 250,000 unique capacitor configurations. So they’re able to meet the needs of almost anyone out there.
The company breaks down their production into three material groups: Tantalum, Ceramics, and Film and Electrolytic.
Kemet is set up so these three groups each have their own respective facilities and research and development efforts.
In the quarter ended June the company did $290 million in sales. Tantalum accounted for 42.2%, Ceramic for 20.5%, and Film and Electrolytic was 37.3% of revenue.
KEMET has the most comprehensive selection of capacitors found anywhere. And that’s what made them the supplier of choice for a lot of big tech clients.
Another differentiating factor between KEMET and its competitors is distribution and capacity. In a world where Apple can increase iPhone production by 6 million units in a quarter you need component manufacturers with lightning fast speed-to-market capabilities.
And if you’re looking for a textbook example of diversification look no further than KEMET.
Their capacitors are used in computing, industrials, telecommunications, transportation, defense and healthcare. No single segment accounts for more than 30% of their revenue. And only one of their customers, a distributor, accounted for more than 10% of their net sales in 2011.
Now let’s take a closer look at their financial numbers…
KEMET’s FINANCIALS
KEM’s fiscal year ends on March 31. Their most recent annual numbers were released on May 20 2011. Revenue for the year was up 38.3% and gross profit was up a whopping 113%.
Net income reached $63 million for the year… which is a staggering turnaround from the loss they reported in 2010. The following two quarters of 2011 were strong but a non-recurring expense cut into the company’s bottom line in their Q3.
As of December 31 the company has $136 million in cash and another $106.5 million in accounts receivable. They also have $229.8 million in long term debt. All in all, it’s a strong balance sheet.
KEMET’s CURRENT PROJECTS
Management has been pursuing an aggressive strategy of vertical integration.
In June 2011 KEMET completed its acquisition of Tennessee based Cornell Dubilier Foil.
Their state of the art foil etching facility is one of the largest in North America. They scooped it up for only $11.6 million.
KEM is also getting into the mining business. They’re opening a mine in Congo.
The region is rich with Tin, Tantalum and Tungsten, all of which can be used by Kemet in their products.
Remember, KEM’s largest business segment is Tantalum. The first Tantalum was scheduled to arrive at the smelters in September 2011.