Will Profits Roll from Investing in Bearings?

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Each industry typically has some bragging rights all its own. For manufacturers of bearings, theirs is the claim that every dollar worth of product that they produce generates $1.43 in additional economic activity, a feat they say is unmatched by any other sector. Bearings can be a backbone for machines ranging from jumbo jets and luxury cars to dentists’ drills.

Given this logic, the rationale seems sound for Kaman's (NYSE: KAMN) acquisition of Florida Bearings in 2012. This acquisition provides a strategic fit to Kaman’s business segments in the aerospace and industrial distribution markets. Besides bearings, the major products in Kaman’s distribution channel include mechanical and electrical transmissions, automation and motion control. The company’s aerospace segment focuses on global manufacturing and subcontracting for commercial and military markets.

Consolidators in metal processing

The same acquisition track forms part of the growth strategy for RBC Bearings (NASDAQ: ROLL) which manufactures and markets engineered precision, plain, roller and ball bearings in the international markets. This March, it acquired Western Precision Aero, a manufacturer of precision gears and components for the industrial and aerospace markets. This acquisition had net sales of about $5 million in the last calendar year. Its output is supplementary to the bearings that RBC manufactures and supplies for diversified industrial and aerospace and defense customers in the international markets.

A search for investment possibilities in the bearings sphere can also include Kaydon (NYSE: KDN). This company designs and manufactures engineered, performance-critical products for a diverse customer base worldwide. It operates in three product segments: friction control, velocity control, and industrial products.

Like Kaman and RBC, Kaydon is also an industry consolidator, having acquired Fabreeka Group Holdings last year. Fabreeka focuses on industrial products for vibration and shock control. In 2011, Kaydon also acquired the German firm HAHN-Gasfedern which is a manufacturer and marketer of gas springs, tension springs and dampers. These acquisitions have diverse industrial markets globally and were integrated into Kaydon’s velocity control segment.

Velocity control saves the day

Kaydon is banking on its velocity control segment to offset lingering weakness on its products for the wind farm industries. In the 2013 first quarter, a $14.6 million decline in sales from its wind business depressed the company revenues which totaled $110 million, down from $116.5 million a year earlier. Adjusted EBITDA in this year’s first quarter amounted to $23.1 million or $0.37 adjusted EPS, compared to the $26.8 million adjusted EBITDA, or $0.44 adjusted EPS posted a year earlier.

The most recent quarter for RBC too showed a sales decline. Its net revenue for fiscal 2013 fourth quarter slipped year over year by 7.5% to $103.0 million from $111.3 million. This decline was attributed to an 18.9% drop in industrial sales which was weakened by slow OEM activity in mining, semiconductor and military vehicles. Strength, however, was provided by defense and aerospace sales which rose 4.9%.

A beat and a miss

RBC realized an adjusted EPS of $0.69 in the fiscal 2013 fourth quarter and $2.43 for the full year, beating analysts’ estimate of $0.63 and $2.38, respectively. Gains in efficiency and margin expansion facilitated the earnings beat.

A solid 16% operating profit margin delivered by its aerospace segment was likewise the bright point in the 2013 first quarter results of Kaman. This segment’s rich program mix accounted for this performance, which was better-than-expected, the company said. Net sales for the quarter rose year over year to $388.1 million from $383.7 million. Its net income of $7.2 million or $0.26 per share was down from last year’s $9.4 million or $0.36 per share and missed analysts forecast of $0.32 per share on revenues of $396.61 million.

Who’s top in dividends?

<table> <thead> <tr><th> </th><th> <p>Kaman</p> </th><th> <p>Kaydon</p> </th><th> <p>RBC</p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$955.62 million</p> </td> <td> <p>$906.29 million</p> </td> <td> <p>$1.22 billion</p> </td> </tr> <tr> <td> <p>Forward P/E (1 yr)</p> </td> <td> <p>12.89</p> </td> <td> <p>14.84</p> </td> <td> <p>17.24</p> </td> </tr> <tr> <td> <p>Long-term growth rate (5 yrs)</p> </td> <td> <p>15%</p> </td> <td> <p>10%</p> </td> <td> <p>14.4%</p> </td> </tr> <tr> <td> <p>Dividend yield (annual)</p> </td> <td> <p>1.90%</p> </td> <td> <p>2.9%</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Taking the above metrics into account, Kaydon should be an attractive pick for the buy-and-hold investors. Its 2.9% annual dividend yield is tops in the machine tools and accessories industry and its forecast 5-year growth ranks among the top 10. As seen in its most recent quarter, the company’s recent acquisitions are starting to deliver. Notably, Kaydon shares have a consensus one-year target price of $31 and a break-out appears to have developed with a new 52-week high at the $28 level set this July.

Foolish take: bearings bear watching

Investors may also be wiser to include Kaman and RBC in their watch list. Along with Kaydon, their products are vital to various industry applications and are unlikely to fade into obsolescence anytime soon. A run-up in the duo’s fortunes remains distinctly possible as the world economic recovery gains more traction.

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Arturo Cuevas has no position in any stocks mentioned. The Motley Fool owns shares of RBC Bearings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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