Friday, May 10, 2013

Hammond Manufactures Value

Hammond Manufacturing (HMM.A) makes products like transformers, racks, enclosures and casing for the electrical products industry. You might expect a company in this industry to barely earn its cost of capital - and you'd be right. What you might not expect is that this consistently profitable company is a net-net and trades barely over 1/3 of it's book value!

Hammond has net current assets of $40 million against liabilities of $25 million. Meanwhile the stock trades for just $13 million.

In addition, the company has "Land and Buildings" (on which it runs its operations) listed at a cost above $8 million, and carried at a depreciated $4 million. The company also has an interest in a vacant, non-operating property (on which it has accrued some environmental liabilities) which it deems to be worth just over $1 million.

Finally, Hammond also has a 40% interest in one of its suppliers. This is carried on the books at $200K, whereas the supplier generated a profit of $100K last year.

Going back 10 years, Hammond's operating margin has ranged between 0.4% (in 2005) and 5.3% (in 2008). Last year's operating margin came in at 3%, which was good for 16 cents a share. Shares currently trade for just $1.10 each. So not only does this company trade at a discount to its earnings, but the downside appears to be protected not only by net current assets but by substantial land holdings.

Now for the less appealing aspects. The company does carry a decent amount of debt. Though this is factored into the net-net calculation, it does mean that if the assets aren't worth as much as they appear to be, this effect will be magnified for equity holders. Also, the company is controlled through a dual-class share structure.

To read the company's annual report, see here. To read more about the company, see here.

Disclosure: Author has a long position in shares of HMM.A


Mike from Guelph said...

Hey Saj,
I became interested in HMM.A a couple of years ago and being from Guelph I bought some shares and attended some AGM's. I held them for a number of years and did okay when they sold a few of their properties but what was abundantly clear at the AGM meetings I attended is that management has no interest in releasing some of the company value and the dual class share system is their protection against any hostile take overs. I agree there is lots of value but there was little to no will when I was a share holder.

John said...

What's your take of its -ve FCF in the last 5 years?

chris said...

just out of curiosity, what are the environmental liabilities that the company is facing?

Saj Karsan said...

Hi John,

I believe this was to accommodate stronger sales. It doesn't appear to me as though they have been destroying value.

Hi Chris,

To satisfy your curiousity, I point you to the explanation offered in the annual report I linked to in the article, as it says it better than I could.

Anonymous said...

This is not a very shareholder friendly company. ROE has been very low over the years. Their CapEx is very high. And as Mike said, their dual share class structure makes it difficult for other shareholders to make any changes.

Anonymous said...

Hammond should be benefiting from the tailwind of a lower Canadian dollar. Also helping is their
capital investment in the past few years and the ever improving U.S economy. Hopefully the share
price can catch up with the book value soon

Anonymous said...

Every now and then they declare special dividends. I would rather they use the money to buyback their undervalue shares instead.