Banking & Finance

BULLS & BEARS: Why investing in Kimball is paying huge dividends

November 20, 2006

Just more than a year ago in this column, I suggested Kimball International's stock might be an attractive investment. At the time we felt that, here was a company in our own back yard-Jasper-that possessed the kind of favorable investment c h a r a c t e r i s t i c s investors should seek.

The column noted that the company had "no long-term debt and holds $117 million, or $3 a share, in cash. The stock has an annual dividend yield of nearly 6 percent, which is covered by the company's free cash flow. At $11 per share, the stock is selling at book value and hovering near a 10-year low."

In other words, Kimball's stock possessed what Ben Graham called a "margin of safety." A simple analysis concluded that the price of Kimball's stock was well below the underlying value of the business. And thus an investor could have bought the stock with a fairly high degree of confidence that the downside risk was limited and that there was a high probability of the investment's being successful long term.

Well, since our purchases in the fourth quarter in 2005, Kimball's stock performance has far surpassed our expectations. The shares now trade around $24 per share. Including the 6-percent dividend, our Kimball investment has returned about 125 percent over the past year.

When we were buying Kimball, we certainly did not expect the stock to more than double in such a short period. Heck, at the time, the dividend, in tandem with the comfort provided by the company's solid balance sheet, was a good enough reason to buy a whole bunch of Kimball.

What happened at Kimball over the past year for the stock to make this kind of move? Not anything major, but a few good things. The company made a couple of nice acquisitions in its electronicsassembly business segment. And Kimball continued a restructuring of its furniture and cabinet division, exiting the business of making wood cabinets for rear-projection TVs, which had been operating at a loss. Most impressive, the company continued to generate gobs of cash in excess of its capital-expenditure requirements. In fiscal 2006, Kimball added another $50 million to its cash stockpile.

But, frankly, a large percentage of the move in the stock can be attributed to the stock market's correcting its valuation error. At the depressed price of $11 per share, investors in aggregate were valuing Kimball at a significant discount from the intrinsic value of the business. This reminds me of the Warren Buffett adage: Invest when the purchase price is so attractive that even a mediocre sale provides a good result.

Alas, buying Kimball was easy. Now as our holdings become long term, a more difficult question arises: Do we "take any off the table?"

At present, our answer is no. Kimball's stock might be a bit ahead of itself at these levels. However, selling assumes we have a better place to put the proceeds. Unfortunately, we do not have another arrow like Kimball in the quiver, as most of the stocks we are reviewing do not offer better valuation. In addition, a oneyear investment, for us, is a very short time to own a stock. And finally, we do enjoy banking those quarterly dividend checks that amount to 6 percent on our original cost.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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