Value Investors: Hammond Power Solutions Is a Good Buy Right Now!

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As multiple companies come out with successful vaccine trial results, benchmark indices are getting back to pre-pandemic highs. The TSX is less than 5% away from its February high of 17,944. While most investors look at bigger names to invest their funds, a lot of value stocks sit there, untouched.

Hammond Power Solutions is one such stock. The company is a manufacturer of dry-type and cast resin transformers and related magnetics that are used in industries as varied as renewable energy to drive and automation to energy distribution (electricity) to infrastructure to irrigation. The company operates across North America, Asia and the Middle East.

It provides control and automation products, including molded machine tool industrial control, industrial open core and coil control, general purpose enclosed, encapsulated control, and energy efficient drive isolation transformers, as well as reactors, DV/DT filters, and motor starting autotransformers.

It also offers low voltage distribution, medium voltage distribution, and power transformers; transformers for specialty electrical applications; and transformers for original equipment manufacturers. Hammond Power serves the oil and gas, mining, steel, waste and water treatment, and wind power-generation industries

Improving Q3 Numbers

Hammond reported its results for the third quarter of 2020 ended September 26, 2020 and the numbers were better than expected. Even though sales fell 14.6% compared to the corresponding period in 2019, earnings per share were up 11% for the quarter and 19% year-to-date.

The company clocked $78.11 million in sales for the quarter compared to $91.5 million in 2019, a decrease of $13.38 million. Year-to-date 2020 sales were $241.92 million compared to $268.12 million in 2019, a decrease of $26.20 million or 9.8%.

U.S. sales decreased 16% to $45.6 million compared to $54.26 million in Q3 2019. Canada clocked $28.83 million in sales for Q3 2020 compared to Q3 2019’s $31.49 million. India’s sales for the quarter declined by a massive 36% to $3.67 million versus Q3 2019’s $5.74 million.

Hammond says that the decline was primarily due to the impact of the COVID-19 pandemic as a lot of its customers deferred electrical projects as markets around the world saw lower economic activity.

This is especially true in India as the government-imposed lockdowns restricted a lot of economic activity. Year-to-date, India’s sales are $9.9 million in 2020 compared to $13.4 million in 2019, a drop of 25.5%.

Hammond’s numbers for Q3 2020 are sequentially better than Q2 2020. Sales for Q2 2020 were $75.39 million. India, especially, only managed $1.8 million in second-quarter sales.

While sales numbers went down, Hammond’s gross margin for the quarter went up to 27.5% compared to 24.9% in Q3 2019. The year-to-date gross margin rate was 26.4% in 2020 versus 24.1% in 2019, an increase of 2.3%.

Hammond CEO Bill Hammond said, “The Company continues to deliver higher than expected profitability through a combination of favorable product mix, cost reductions, as well as customer short lead time premium pricing and government wage subsidy. The strength and resiliency of our business has contributed to our relative success during this pandemic.”

It helped that the company was also a recipient of the Canada Emergency Wage Subsidy (CEWS) benefit in quarters 2 and 3, 2020, which offset increased operating expenses related to the pandemic.

Catching Up Quick

The stock was trading at $7.13 before the markets crashed. Today, the stock is trading at $7, just 13 cents away from its pre-pandemic level. Analysts have given it a price target of $7.3 but I believe that the company is a value play that will go up once the vaccines are deployed.

After Pfizer and Moderna, the AstraZeneca-Oxford venture says its vaccines are 90% effective and they are trying to get the cost of the vaccine down to $3 per dose which is great news for countries like India that are not in a position to afford the Pfizer vaccine.

This also bodes well for companies who have operations in India like Hammond where economic growth has fallen off a cliff. However, the recent quarter saw a number of companies in the country beat economic forecasts and post good results. As business slowly returns to normal, revenues will go up.

A very encouraging sign for the company is that insiders in the company have bought shares worth $101,000 in the year so far. Insiders now own 34% of the company, worth about $23 million.

Apart from this, investors can also look forward to the healthy 5.5% forward dividend yield. Hammond is a good company to buy for the next year and beyond.

 

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