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colorful high voltage power transformer

This boring stock is up over 160% this year

Aug 25, 2023   Category: Cyclicals, Fast Growers, Tesla

When company’s are growing at over 40% usually it’s a tech stock that’s being touted as the next big thing by famous investors like Cathie Wood. This little company is too small for anyone to care about it which is why it’s trading at a modest price.

Hammond Power Solutions (HPS.A.TO) is a manufacturer of dry-type electrical transformers. The earnings of the over 100 year old family run business are growing fast. President Biden’s infrastructure bill is encouraging organizations to replace less efficient wet transformers with dry-type transformers. A specialty of Hammond. As well, the growth in electricity demand for things like data farms and electric cars are adding to sales across the globe. Tesla (TSLA) is one its customers. The need to improve electrical grid efficiency around the world are also increasing Hammond’s backlog of orders.

Hammond is definitely in one of those no-growth industries that Peter Lynch describes as being a great place to find bargains overlooked by Wall Street. Only 3 analysts cover Hammond. Not to mention, it’s really boring. Just saying “electrical transformers” puts me to sleep. Another feature of a good investment according to Lynch.

Digging into the numbers we can see Hammond has a peg ratio of 0.0726. Anything below 1 is good. This is exceptional. It’s 5-year earnings growth is 48% and yoy quarterly is over 100%. Amazing. The question is, is this sustainable?

Can the growth continue?

According to Hammond, they have a growing backlog of orders. Apparently customers are growing concerned with locking in prices for transformers as demand grows and potential raw material supply disruptions may impact Hammond’s ability to deliver. It’s a concern its management has highlighted in their annual reports. As of this writing gross profit margin is 31.56% and rising. A good margin. Hopefully it can be maintained.

Recently, the company announced the departure of its long time CEO of Bill Hammond. The grandson of its founder. He’s sought out veteran Adrian Thomas from Schneider Electric as his replacement. Hammond will stay on as board chairman and continues to own 30% of Hammond’s shares.

The stock has had a big run up but I believe so long as the earnings growth continues somewhere over 20% Hammond will be a good investment. It looks as though the trend towards improved grid electrification isn’t stopping anytime soon so sales should stay strong.