Key Technology, Inc.: Picking at your food
Key Technology, Inc. (Nasdaq: KTEC) cleans your plate before you get the chance. It dehusks nuts, picks nits out of green beans, combs through lettuce, pits peaches, slices and dices potatoes, and prepares poultry. The company does everything to make sure your chicken dinner is processed to perfection.
Founded 60 years ago as a maker of vegetable processing equipment, Key has morphed into a global supplier to the food industry. It melds electro-optical automated inspection and sorting systems with processing systems that include conveyors and preparation equipment to pinpoint and eject unacceptable matter in the food flow. Its systems improve product yield and quality over manual sorting and defect removal, saving on labor costs.
The biggest markets for Key are processors of potatoes (mostly French fries), vegetables, fruit and snack foods. The French fry is king, representing 90% of the more than eight billion pounds of frozen potato products processed annually in the United States. The expansion of American-style fast food chains in other countries is fast turning others into French fry fanatics and opening avenues for Key. The company also cleans and processes tobacco, and is successfully selling into the emerging pharmaceutical and nutraceutical industries. Indeed, Key believes there are many additional applications for its systems in both food and non-food markets.
Mastering the food chain has its rewards. Key closed fiscal 2007 on Sept. 30 with annual sales of $107.5 million, up 27% from the previous year. Earnings were $1.37 per diluted share, turning around a loss of $0.15 in fiscal 2006. Key topped the year with a first-rate fourth quarter, exceeding the expectations of the one analyst who covers the company. Earnings were $0.42 per share versus a loss of $0.11 in the year-ago quarter. Revenues were $31.7 million, up 31%.
Analyst James Ricchiuti at Needham and Company reiterated his “buy” rating and raised his target price to $36 from $30 after the release of fourth-quarter results. Ricchiuti wrote Nov. 16 that he expects Key’s strong momentum to carry through fiscal 2008 and 2009 on increased sales to overseas processors, continued expansion into the emerging pharmaceutical inspection market and solid after-market business.
He wrote that Key is expected to further leverage its operations, benefiting from a broadening product line for its core food processing market, growing momentum in the pharmaceutical market and additional inroads in international markets such as Latin America and China. International revenue was 46% of fiscal 2007’s total and grew to 53% in the fourth quarter.
Key has invested heavily in China. In 2006, it opened offices and located personnel in the country. Sales stayed flat with 2006 in 2007 as food processing progress was offset by a slowdown in sales volume of tobacco sorting equipment. Key believes a rise in orders in the last two quarters of fiscal 2007 indicates expansion efforts into the Chinese food processing market are gaining traction. And Ricchiuti says concerns about food safety are expected to spark sales in China, which currently accounts for about 12% of global fruit and vegetable exports.
Growth in the new market of pharmaceuticals and nutraceuticals also is expected to be a catalyst in 2008. The company’s business unit for this market is Symetix, which provides automated inspection and specialized conveying systems to ensure quality and regulatory compliance for manufacturers of solid dose products — capsules, tablets and softgels. “It appears that F08 could be the breakout year for Symetix,” wrote Ricchiuti.
Keeping 2007’s breakout stock performance going might be as easy for Key as making the perfect potato chip. Key started the year by dipping below $14, and then more than doubled to end 2007 at $34.53 — already near Ricchiuti’s increased target price of $36. Shares have held their 2007 gains through the rocky start of 2008, closing Monday at $34.01, up $0.12.
Ricchiuti also increased his fiscal 2008 earnings per share estimate to $1.47 from $1.35, and forecast revenues at $125.5 million, up 17% year-over-year. He initiated estimates for fiscal 2009 with earnings at $1.90 per share and revenues at $144 million. Key’s P/E based on the 2008 projection is 23.
Boding well for 2008, too, is an order backlog of $30.9 million at the end of September, up from $22.8 million at the end of fiscal 2006. New orders also were strong in 2007, increasing 27% to $115.3 million in the year. The company’s higher margin automated inspection systems orders increased to almost 42% of order volume in fiscal 2007, compared to 40% in the prior year.
And Key, with a market cap of $189 million, has a balance sheet as clean as a ready-to-eat baby carrot. It has zero long-term debt and more than $5 cash per share. Given its strong cash position, Ricchiuti says he believes Key’s board is strongly considering a dividend and that a stock split is a distinct possibility.
Credited with putting Key on the growth track is CEO David Camp, who joined the company in September 2006. From 2002 through 2006, Key’s revenues were virtually flat. But since Camp’s arrival, the company has reduced its expense structure, closing its sluggish Freshline processing equipment operation in Australia and consolidating most of its Medford, Ore., operations in its headquarters in Walla Walla, Wash., among other changes. The company’s strategies in China and pharmaceuticals are working, and are to continue in 2008.
Competitors include FMC Technologies, Inc. (NYSE: FTI), Heat & Control, Inc., BEST N.V. and others. Key has seen smaller competitors entering its markets, including the introduction of potentially competing tobacco sorters into the Chinese market manufactured by Chinese companies. Entering new markets also will bring on new competition.
Other analysts undoubtedly will start covering Key soon. That’s what effective management, a soaring stock price, financial execution, traction in China and entry into other emerging markets will do for a company. Key also is presenting at Needham and Company’s growth stock conference this week. So keep an eye out for Key (KTEC) — it looks pretty darn appetizing.
