Flying high

Entrepreneur, July, 1997 by Allan S. Roness

The company: Kellstrom Industries Inc. in Sunrise, Florida, is a rapidly growing independent dealer of refurbished jet engines and parts.

Markets: As a fast-growing player in the $3.75 billion aircraft engine parts industry, Kellstrom provides its products to 26 major airlines worldwide. The current trend of airlines outsourcing is providing independents such as Kellstrom with growth opportunities.

The Outlook              Past and projected sales and earnings

Year                      1995     1996    1997(*)   1998(*)

Revenues ($M)             $14.7    $24.9   $75       $100
Net income ($M)           $1.4     $2.6    $8.1      $11.3
Revenue growth rate       N/A      69%     273%      47%
Earnings growth rate      N/A      85%     311%      39%
Shares outstanding (M)    7.2      8.2     8.9       9.6
Share price               N/A      N/A     $18       $24

* Estimated

The company is one of the few resellers of its type to have received ISO 9000 quality certification, an important factor as safety and quality become larger purchasing determinants than price in the wake of recent amine safety problems. The Federal Aviation Administration requires airlines to use only accredited suppliers, and partly due to the ISO 9000 certification, Kellstrom has obtained approved supplier status from more than 50 customers in six countries.

The Sizzle: Kellstrom's top seven officers have a combined 135 years of experience in the aircraft industry. Their depth of experience and worldwide industry contacts are a driving factor behind their success. Earlier this year, when Kellstrom bought out its former rival, the $22 million International Aircraft Support Inc., it acquired complementary product lines that today power more than 65 percent of the world's aircraft.

Reduced inventories at major airlines in response to financial controls, shrinking lists of approved suppliers, worldwide deregulation and projected growth in numbers of passengers are all trends that should provide additional opportunities for Kellstrom.

The Risks: Revenue slowdown could occur if the company is unable to continue making financially prudent acquisitions. However, since the industry is highly fragmented, with many small suppliers that may be acquired, the risk is not significant over the near term.

Historical Financial Performance: Since 1994, revenues have increased from $8.2 million to $24.9 million last year. During the first half of 1996, European sales nearly quintupled. The explosive growth in overall sales and earnings is largely attributable to increased working capital and available credit sources.

Projected Financial Performance: With the airline industry likely to become even more selective, Kellstrom should be able to maintain above-normal growth for the foreseeable future. Present financing should be sufficient for revenue growth to $150 million within the next two years. Projections in the chart (left) are based on current operations and the company's potential to use capital in ways that will boost earnings per share, such as through prudent acquisitions. Given the company's rapid growth and industry position, the price-earnings ratio should reach 18 to 20 in the next two years.

At A Glance

Name: Kellstrom Industries Inc. Reported 1996 revenues: $24.9 million Reported 1996 net income: $2.6 million Recent price: $13.63 (3/31/97) Price-earnings ratio: 14.5 (1997 estimate) Market: OTC Symbol: Kell

Allan S. Roness is director of equity research at JWCharles/CSG Securities, a national brokerage firm in Boca Raton, Florida. The above opinions are those of the author and not of Entrepreneur. This investment vehicle may not be right for you. Carefully investigate before investing.