Kemet Corporation (NYSE: KEM), an information technology firm with a market capitalization of $1.4 billion, saw its share price increase by 36.4% over the last month. As a small-cap stock, hardly covered by analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. However, could shares still be trading at a relatively cheap price? Let’s take a look at Kemet’s outlook and value based on its most recent financial data to see if there are any catalysts for a price change.
Is Kemet Still Cheap?
According to my valuation models, the stock is currently overvalued by approximately -17.1%, trading at $25.28 compared to its intrinsic value of $20.96. Not the best news for investors looking to buy!
|Analysis||Model Fair Value||Upside (Downside)|
|10-yr DCF Revenue Exit||$14.12||-44.1%|
|5-yr DCF Revenue Exit||$17.13||-32.2%|
|Peer Revenue Multiples||$26.36||4.3%|
|10-yr DCF EBITDA Exit||$14.45||-42.8%|
|5-yr DCF EBITDA Exit||$17.68||-30.0%|
|Peer EBITDA Multiples||$36.00||42.4%|
Click on any of the analyses above to view the latest model with real-time data.
However, will there be another opportunity to buy low in the future? Given that Kemet’s stock is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) could mean the price can sink lower, giving investors another chance to buy in the future. This is based on its beta of 4.35, which is a good indicator for share price volatility.
What Does The Future Of Kemet Look Like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.
source: finbox.io data explorer
Kemet’s revenue growth is expected to average 1.4% over the next five fiscal years indicating that the core business could be in real trouble. In fact, this could imply that its products or services are losing demand and/or becoming irrelevant.
How This Impacts You
Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:
“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”
While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.
Unfortunately for shareholders, Kemet’s future growth is relatively low and it appears the stock is now trading above its intrinsic value. Therefore, it may be a good time to begin reducing your position in the company. However, there are also other factors to consider that could explain the current overvaluation.
But before making an investment decision, I recommend you continue to research Kemet to get a more comprehensive view of the company by looking at:
Risk Metrics: what is Kemet’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.
Valuation Metrics: what is Kemet’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.
Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Kemet’s inventory turnover here.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.