Friday, December 19, 2008

Power Up With Hammond

Six months ago, we responded to a "buy" recommendation on Hammond Power Solutions (HPS.A). At that time, we disputed the recommendation and suggested it had come far too late, as the company no longer appeared to be the steal it was in 2004 when it had no such recommendation.

Since July, however, the company's stock price has fallen 50%, and HPS now looks like a company trading with a large margin of safety. HPS makes custom electrical magnetics and dry type transformers for use in several industries including wind power, oil and gas, mining, waste, and water management, without being dependent on any single market. The company has been growing quickly, having doubled sales in the last four years, and now has a P/E under 5.

Since it is a relatively small company (with a market cap around $70 million), small investors have an advantage since it falls outside the range of the largest funds. For small investors who are paying attention, this company looks like it has a bright future. Even while the economy slows, this company has been growing its backlog (even organically - i.e. without acquisition). While it most certainly cannot completely escape the global spending slowdown, its backlog will certainly help smooth out this effect, and its low debt levels should keep it safe until government and central bank liquidity injections are felt throughout the economy.

Disclosure: Author owns a long position in HPS.A

4 comments:

Mike Kazmaier said...

Hey Saj, Reyer,
I participated in Georges Value Investing Course last June and you may remember that I hail from Guelph (at the time Reyer and I discussed Linamar in great detail) so I know Hammond pretty well. I actually came across it back in November (before I found your blog) and I agree, I think it looks like a great buy around $6.00. I must have learned something in the course if I am coming across some of the same companies as you guys. Sweet!

Saj Karsan said...

Hi Mike, good to hear from you! What do you think of Linamar now?

HPS just reported some great results too, enjoy!

Mike Kazmaier said...

Hey Saj,
I will admit I have been keeping my eye on them and based on my last vaulation they seem very cheap from a NAV standpoint but I just can't pull the trigger with all this GM, Chrysler stuff going on. I'm pretty sure at this point at least one of them is going to go Chapter 11 if not both and I'm just afraid that Linamar might be a value trap because, like it or not they are handcuffed to the Big (rapidly getting smaller) Three at the moment.

Saj Karsan said...

Hi Mike,

I agree with your conclusions. The risk of a major customer going bankrupt is high, which is the same problem we saw with Magna here.

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