Monday, December 29, 2014

Hammond Grows Out Of Value

Almost two years ago, Hammond Manufacturing was brought up on this site as a potential stock idea. I recently sold out of the stock as the company's shares have almost doubled, while management has decided to embark on a substantial capacity expansion plan.

Hammond was ridiculously cheap as the original post indicated, and the company's earnings only grew as the weakening Canadian dollar increased profits. But it's important to keep in mind that this is a company that does nothing special; products like transformers and casings seem interchangeable, and the company's historical financial record bears this out.

So when a company like this embarks on a massive expansion plan (Hammond announced last week that it would spend more than its current market cap in investment capex over the coming years!), I get wary.

It doesn't help that management doesn't seem too interested in increasing shareholder value: dividends instead of buybacks, sitting on excess assets, expanding despite poor returns on capital. While the company is still cheap, I'm satisfied that it's no longer so cheap that these things don't matter anymore.

As such, Hammond Manufacturing becomes the latest company to join the Value In Action page. Good luck to those who hang in there!

Disclosure: No position

5 comments:

Anonymous said...

Well done!

BF

Baruch said...

Nice one!

Franck des daubasses said...

Hi,

May be a new look at this stock:

1/ a large discount on equity
+
2/ PE < 5
+
3/ a new growing trend

What else?

Saj Karsan said...

Hi Franck,

I can understand the appeal, and I think it's possible this stock will do very well. But for me the large debt and the less attractive (vs P/E) EV/EBIT ratio turns me off, considering the poor historical returns on capital from this company.

Franck des daubasses said...

OK. Thanks for your feedback.

I'm in.

For me, it is a new paradigm.
Let's time see if I'm right....

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