Saturday, December 26, 2009

The Quiet Before the BOOM

Dynamic Materials (BOOM) loves to blow up things. They use more than 30,000 lbs of explosives each day. What do they do with all that mayhem? They are the world's leading provider of explosion welded clad metal plates that fuse together dissimilar metals that can't be readily bolted or hand welded. There is a lot of demand for such things as strong carbon steel welded to things like titanium and corrosion suitable metals used in upstream oil and natural gas processing as well as other petrochemical uses, industrial refrigeration, aluminum production, power generation, alternative energy, and shipbuilding. If you think this sounds like a Chinese laundry list of everything that's good in today's growth investing, you'd be right. Dynamic Materials is a global provider with growing involvement in China and the emerging markets in general. There is, of course, a shale natural gas production boom about to happen in North America as well - fertile ground for BOOM's products.

The phenomenon of microfusion was observed as early as World War I, when bullets were fired into armor plates to join dissimilar metals that were not able to be welded by conventional methods. This also was observed in the remnants of bombed-out bridges in World War II.

It doesn't sound like it would work, but DuPont started welding things together like this on purpose by means of carefully designed explosions and offered its Detaclad process in 1959. The idea was to blast away oxide and all contaminants and join metal by force and molecular intermingling instead of heat and melting. Denver based Martin Marietta licensed this method to build jet engine parts with. In 1965, a group bought Martin's explosion cladding business, and now it is Boulder based BOOM.

It has been a fast grower the last 6 years:

The stock has been in the doghouse all year long except for a brief but severe beating down to near zero in February/March - a measly +7% 52 week return. PE for ttm is a modest 19, price/cash flow is 8.0 - pretty cheap for a stock in a sweet spot of emerging market growth that has grown its cash flow at an annualized clip of a whopping 42% the last 6 years. The recession has dented their results as you'd expect with a deep cyclical. But the stock has been hammered out of proportion to this dip and is now way out of whack with basic cash flow from operations, which is still on a robust growth track. Its technical condition is an extreme quieting pattern:

The 50 and 200 dma have accomplished a positive cross and are now both sloping up, suggesting that the stubborn resistance level at $20 will soon go BOOM.

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