Charlie Munger, Vice-Chairman of Berkshire Hathaway once said that an investor would have better results if he would focus on companies that repurchase their own stock. His theory may seem logical as companies that invest in own stock generate excess cash and believe that its stock offers attractive returns than other potential investments.

One growth stock that comes in mind is Kadant, Inc. (NYSE: KAI). Based in Westford Massachusetts, the company is a supplier of equipment used in global papermaking and paper recycling industries through its Papermaking systems business. It is also a manufacturer of granules made from papermaking byproducts under its fiber-based products segment. One of the key advantages of Kadant is its specialized process and large installed base, which translates to a low-cost manufacturing model. Over for the past few years, this model has helped maintain its operating margins and outperform its competitors.

During the last quarter of 2012, it announced that its Board of Directors has authorized the repurchase of up to $20 million of its common stock. For the period, it repurchased a total of 669,725 shares of common stock for an aggregate price of $14.6 million. As of the latest quarter, it has cash of around $55 million and average annual cash flow of $31 million. With minimal debt and capital requirements, it makes sense to repurchase its own shares. This definitely enhances its shareholder value, resulting in better shareholder returns in the future.

This is also a sign that management expects strong financial performance going forward. In fact, trailing 12 months revenues grew by 12% compared to the industry’s dismal growth rate of 3%. This also translates to net profit growth of 20% for the period. For the last 5 years, the company has grown its earnings by an average of 18.57% a year.

Analysts expect per share earnings of $2.35 for this year. This is higher by 5% compared to the same period last year. For the next 5 years, earnings are expected to remain stable with growth rate of around 15%. Despite these favorable prospects, the stock is trading at 9.18 times earnings. This is lower than its 5-year average price earnings ratio band of 8 times to 17.55 times earnings. Also, its peers are trading at higher valuations. For instance, John Bean Technologies Corp. (NYSE: JBT) is valued at 21 times earnings. Columbus McKinnon Corp. (NASDAQ: CMCO) trades at 11 times earnings.

The catalyst for the stock is its increasing cash hoard. This will be used to aggressively repurchase its own stock in the market. Investors will soon realize that the stock is too cheap to ignore relative to its financial performance. It would also benefit investors if management decided to put a dividend policy in place.