Paper’s Tiger: Kadant Inc. (KAI)

Kadant Inc. makes equipment and other products at the core of the paper industry: machines used to process and formulate pulp into paper products. Its machines prepare stock for both recycled and virgin fiber, including pulping, cleaning fibers, and deinking recycled papers. It also has a line of fluid- and waste-management products, which help keep paper operations efficient and clean. Further down the line, Kadant also takes papermaking byproducts and produces granules that can be used for lawn and garden applications. For a small company, Kadant is remarkably positioned globally to take advantage of the fact that much paper production generally, and recycling in particular, happens outside of the United States. The company has manufacturing facilities and sales teams working throughout Asia and Europe, and almost 60% of its business originates overseas.

The last decade has seen dramatic growth for Kadant. The company has tinkered in a few related businesses (e.g. a discontinued line of recycled-content composite decking and a current line of repurposed garden granules), but it continues to see most success focused on papermaking products. But Kadant’s sales have diversified geographically over the last five years. In 2011, for the first time, the company generated more revenue in China than it did in France, demonstrating that its special attention to Asia is paying off. The company has very low debt, solid cash flow, and a good backlog of orders heading into 2012. Although foreign economies, particularly those in China and Europe, are in the midst of a pullback, Kadant has surprised analysts the last few quarters with better-than-expected earnings. Unlike some steady-eddy industrials, however, Kadant does carry a fair amount of risk. The cyclical nature of its business and the small size of the company have led to a bumpy stock chart. The stock touched its pre-financial-crisis highs again last June but fell precipitously by September because of the European debt crisis. It has regained some ground, but is still currently trading about 20% lower than last summer. Kadant has reams of long-term potential for investors with the fiber to tolerate volatility.

Corporate Responsibility

As with many smaller industrial companies, Kadant’s primary claim on the mantle of social responsibility is through its products, in this case the machinery for recycling paper. The company does promote energy efficiency within papermaking operations generally, as well as its own industrial operations, and has not been involved in any environmental or safety controversies. However, it does not have substantive sustainability reporting and lacks most advanced supply-chain and governance policies. Kadant has one female executive officer but no women on the Board.
Revenues: $335 Million
2013E $2.51
2012E $2.15
2011A $2.15
Projected Annual Growth Rate: 10%
Dividend: N/A
52 Week High-Low: $34.95 – $16.10
Risk: High