Why Do Analysts Love KKR?

With shares of Kohlberg Kravis Roberts & Co. (NYSE:KKR) trading at around $18.62, is KKR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

KKR is a global private equity investment firm specializing in acquisitions, leveraged buyouts, managed buyouts, special situations, growth equity, as well as mature and middle market investments.

KKR has been on the move the past few years, scooping up companies that add to their impressive and diversified portfolio, and adding to their revenue streams. Prior to taking a brief look at some of these acquisitions as well as KKR’s fundamentals, it’s important to note that companies that buy aggressively are far from hurting.

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In 2011, KKR acquired Capital Safety and Capsugel. Capital Safety is a manufacturer of fall protection, confined space, and rescue equipment for oil and gas, construction, utilities, wind energy, transportation, telecommunication, mining, and general industries. Capsugel sells drug capsules as well as equipment for sealing liquid capsules.

KKR now plans on acquiring Gardner Denver Inc. (NYSE:GDI), which is an industrial equipment manufacturer based in Pennsylvania. KKR beat out The Blackstone Group (NYSE:BX) on the acquisition. Of course, the deal must pass through shareholders and regulators. If everything goes according to plan, then the deal will close in the third quarter of this year.

KKR is looking to close another deal in the second quarter of this year, which would give it a controlling stake in German company, Wuerttembergische Metallwaren Fabrik AG, or WMF. WMF manufactures and distributes kitchenware, food-processing machines, and coffee-making accessories. It’s a well-known brand throughout Europe. KKR would like to expand the business in Asia and bring it to the United States. The latter option might have potential, but there will also be a lot of competition.

There’s a lot of positive news thus far, which will likely bode well for the company in the future, but the biggest selling point for most investors is a 14.40 percent yield. It’s not easy to find such an impressive yield for a company this financially sound.

The chart below will compare fundamentals for KKR, The Carlyle Group (NYSE:CG), and The Blackstone Group. These three companies differ in size. KKR has a market cap of $5.04 billion, The Carlyle Group has a market cap of $1.31 billion, and The Blackstone Group has a market cap of $10.98 billion.

KKR

CG

BX

Trailing   P/E

8.74

73.07

48.24

Forward P/E

8.15

8.87

7.38

Profit Margin

5.80%

0.68%

5.54%

ROE

20.30%

19.45%

8.11%

Operating Cash Flow

$6.20 Billion

$2.03 Billion

$583.16 Million

Yield

14.50%

11.20%

8.50%

Short Position

0.70%

1.50%

1.90%

 

KKR managed a clean sweep for basic fundamentals. In other words, KKR is the most impressive in every single category, which is extremely rare in these comparison charts – regardless of the industry. Let’s take a look at some more important numbers.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for KKR is stronger than the industry average of 0.50. It’s also stronger than the debt-to-equity ratios for The Carlyle Group and The Blackstone Group.

Debt-To-Equity

Cash

Long-Term Debt

KKR

0.03

$1.37 Billion

$1.36 Billion

CG

1.10

$2.28 Billion

$14.88 Billion

BX

1.18

$1.06 Billion

$13.22 Billion

 

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T = Technicals on the Stock Chart Are Strong   

KKR has outperformed The Carlyle Group, The Blackstone Group, and the S&P 500 over the past year.

1 Month

Year-To-Date

1 Year

3 Year

KKR

6.04%

31.98%

40.57%

N/A

CG

-4.51%

19.29%

N/A

N/A

BX

4.66%

29.80%

29.79%

59.82%

 

At $18.62, KKR is trading below its 50-day SMA, and above its 100-day SMA and 200-day SMA.

50-Day   SMA

17.80

100-Day   SMA

16.13

200-Day   SMA

15.02

 

E = Earnings Have Been Steady            

There have been inconsistencies, but earnings have been improving over the long haul.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

235.18

331.27

435.39

723.62

568.44

Diluted   EPS ($)

N/A

-0.38

1.62

0.01

2.21

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and an increase in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

209.36

116.31

112.36

162.15

177.62

Diluted   EPS ($)

0.17

0.80

0.58

0.49

0.34

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Private equity has been doing well as it has taken advantage of uncertainty. This often leads to strong results when a more optimistic economic environment returns.

An unstable U.S. dollar is one potential negative. An uncertaint global economy is another potential threat.

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Conclusion

KKR is effectively diversifying its revenue sources. It’s also one of the most trusted private equity firms in existence. Of 14 analysts covering the stock, 12 are on the Buy side, two recommend Hold, and zero are on the Sell side. Other positives for KKR include excellent valuation, impressive margins, strong cash flow, superior debt management compared to other firms in the industry, and a yield of 14.40 percent.

KKR is a long-term OUTPERFORM.

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