Opinions
Brett Girard, CPA, CA, CFA
Hammond Power Solutions Inc.
HPS.A-T
BUY ON WEAKNESS
Nov 13, 2024
Stock price when the opinion was issued
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Still owned by founder, second generation. Has done the same thing for a long time; what changed is number of places they could sell to. Good business, but not a great price right now.
DeepSeek was like a "man overboard" moment for a stock like this, as many own it simply as a beneficiary of data centre buildout. This sentiment makes it harder for the long-term investor.
Premium contentHPS manufacturers electrical transformers such as those used in data centres with plants in Canada, the US, Mexico and India. Recently reported earnings showed record sales with 11% growth over the yar. It trades at 15x earnings, 3.5x book and supports a ROE of 26%. We recommend setting a stop-loss at $70, looking to achieve $119 -- upside potential of 28%. Yield 1.2%.
(Analysts’ price target is $160.50)Premium contentWe reiterate this electric transformer manufacturer, involved in data centre and cloud projects, as a TOP PICK. Recently reported earnings showed a 5% increase in year on year sales and a 17% increase in backlog of orders, which is great timing considering their new production factory is expected to open sooner than expected. It trades at 14x earnings, 3x book and supports a robust 31% ROE. We recommend trailing up the stop (from $70) to $80, looking to achieve $131 -- upside potential of 28%. Yield 1.1%
(Analysts’ price target is $148.25)Premium contentPremium contentPremium contentThe results were a bit weak on the growth margin side and the backlog decreased a bit. There is huge demand for new data centres and this is good for Hammond Power. He started accumulating it this year. There is a new plant opening up which will be very efficient for electrification demands.
On a tear. It's always been expensive. Revenues have been growing, though net income's been a bit slow to follow. If it can get to a critical mass, then stock will be OK. Expect volatility. Look for big selloffs around quarterly earnings. Watch position size in your portfolio.