Lydall, Inc.: Why This Industrial Stock Can Double

Lydall, Inc.: Why This Industrial Stock Can Double
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Lydall, Inc. Will Reward Patient Investors, But it Will Take Time

The global macro environment for trade and supply chains is a mess and is undergoing a structural change that could uproot how things have been done.

Companies that source from outside the U.S. and have foreign exposure are at risk. The result has been a hemorrhaging in the stock prices of many of these companies, especially those on the smaller end.

But over time, these battered stocks should recover and return above-average gains for patient investors.

Take the case of Lydall, Inc. (NYSE:LDL), a maker of specialty engineered products used in the thermal/acoustical and filtration/separation markets worldwide. Industries served include agriculture, automotive, construction, earth-moving, and industrial.

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LDL stock is down more than 50% from its 52-week high, but it recently made a breakout attempt from the sideways channel, as the below chart shows:

Chart courtesy of StockCharts.com

Lydall stock’s rising relative strength and moving average convergence/divergence (MACD) is supportive of a potential move back toward $24.00 and $30.00.

The concern is the relatively high foreign exposure of revenues for Lydall, which of course, are affected by the current tariff and trade risk.

While the immediate future is cloudy, the company has been delivering strong fundamentals. And with the Lydall share price having fallen so much, the valuation offers a decent risk/reward scenario.

My Bull Case for LDL Stock

Lydall, Inc. reported higher revenues in the last three straight years, including a record $785.9 million in 2018.

Fiscal Year Revenue (Millions) Growth
2014 $535.8
2015 $524.5 -2.1%
2016 $566.9 8.1%
2017 $698.4 23.2%
2018 $785.9 12.5%

(Source: “Lydall Inc.MarketWatch, last accessed August 9, 2019.)

There are some concerns regarding the lower revenue growth rate recorded by Lydall in 2018 that may have been a result of tariffs.

The revenue growth rate is estimated to slow to 11.6% (to $876.75 million) in 2019, followed by slowing further to 3.8% (to $910.0 million) in 2020. (Source: “Lydall, Inc. (LDL),” Yahoo! Finance, last accessed August 9, 2019.)

On the plus side, Lydall manages to deliver profits, along with positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow (FCF).

The company’s EBITDA grew from 2015 to 2017, prior to declining slightly in 2018.

Fiscal Year EBITDA (Millions) Growth
2014 $54.2
2015 $71.0 31%
2016 $77.8 9.5%
2017 $93.6 20.3%
2018 $87.6 -6.4%

(Source: MarketWatch, op cit.)

Lydall is profitable on both a generally accepted accounting principles (GAAP) and adjusted basis.

The company’s GAAP diluted earnings per share (EPS) fell in 2018, but its EPS estimates have increased for 2020.

Fiscal Year GAAP Diluted EPS Growth
2014 $1.28
2015 $2.71 111.7%
2016 $2.16 -20.3%
2017 $2.85 31.9%
2018 $2.02 -29.2%

(Source: MarketWatch, op cit.)

Lydall, Inc. is expected to see its adjusted EPS slide to $1.50 per diluted share in 2019 (from $2.43 per diluted share in 2018) and then rally to $2.21 in 2020. (Source: Yahoo! Finance, op cit.)

The company’s free cash flow has been positive in each of the last five years, but there needs to be some consistency.

Fiscal Year Free Cash Flow (Millions) Growth
2014 $27.7
2015 $15.5 -44.1%
2016 $44.3 186.2%
2017 $35.9 -18.8%
2018 $13.5 -62.6%

(Source: MarketWatch, op cit.)

Analyst Take

While Lydall, Inc faces some macro uncertainties, the sell-off in LDL stock has resulted in an intriguing situation that could return good gains for patient investors.

As of this writing, the stock trades at 9.3 times its 2020 consensus EPS estimate and it has a price/earnings to growth (PEG) ratio of 0.81.

Some may argue that Lydall stock is a value trap, but I take the view that it will likely not keep trading at its current low valuation much longer.