National Bank Financial analyst Rupert Merer sees Hammond Power Solutions Inc. as “a strong company with a long runway for growth and a perfect pureplay candidate for investors looking to play re-shoring, electrification and accelerating data center demand.”
However, pointing to “rapid” share price appreciation and near-term capacity constraints, he initiated coverage of the Guelph, Ont.-based manufacturer of dry electrical transformers with a “sector perform” recommendation.
“Hammond Power Solutions (HPS) has a manufacturing presence across the North America, and India and a dominant share of the dry-type transformer market in North America (approximately $3-billion fragmented market),” said Mr. Merer. “Revenues grew 87 per cent over the last two years along with demand for its products and the market should continue to grow at more than 10 per cent per year. Growth is coming from residential, commercial, industrial and transportation markets and supported by sectoral tailwinds from re-shoring, electrification and rising data center demand. The company is also expanding its offerings in related power quality products.”
“With revenue growth of 27 per cent year-over-year in 2023, EBITDA margins were up y/y to 17 per cent from 12 per cent, driving a 68-per-cent year-over-year increase in EBITDA. HPS achieved $5.33 EPS in 2023, a two-year increase of 313 per cent. The stock has responded, up more than 1000 per cent over the last two years. HPS is in a good position to grow, as it has a strong balance sheet, strong FCF and a small dividend. HPS achieved a 26-per-cent ROIC in 2023 and sees a rapid payback on organic growth. It could look for M&A in associated product lines, like power quality products.”
Mr. Merer warned capacity issues could limit top-line growth in 2024 with Hammond currently running close to its production limits at $800-million per year in revenue. He said expansion later this year could raise those gains to $900-$950-million annually.
“HPS has plans to grow faster than the market and should soon start its next investment cycle. With a year-long lead time to receive production equipment, growth could accelerate again in 2025 and beyond,” he said.
The analyst set a target of $164 per share. The current average on the Street is $140.50.