Hammond Power Solutions Inc T.HPS.A

Trevor Rose's Insights - comment

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Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research(A Commentary)

24/05/2024

 

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research

Company Highlight: Hammond Power Systems (HPS.A)

Prior to HPS.A releasing first quarter earnings, the stock had been a small-cap darling on a strong uptrend. What appears to be a huge earnings miss, was heavily impacted by non-cash expenses through share-based compensation when employees exercise stock options. With the growth of the company, hiring has increased, but with the shares up 242% the value of share-based compensation has increased dramatically and is charged against earnings. While this is not a positive, it is something common that high growth companies can experience. We do not think it should be a big factor driving the stock down, but the big EPS miss and high levels of stock-based compensation were a talking point leading to the stock taking a hit. Sales growth did also slow a bit from prior quarters which the market further did not like. However, HPS.A is increasing prices for Q2, and if demand is inelastic to this price change, then growth could be back up into the teens. Distribution growth was strong in the US, and the backlog rose 11.1% year over year. Margins were still decent despite a less-attractive product mix and start-up costs in Mexico. SG&A costs did rise. While not a great quarter overall and there is some reason for the sell-off, HPS.A still has plenty of potential and recently increased its dividend substantially.
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More reassurance. GLTA TerraVest Industries Inc. (TVK), Hammond Power Solutions Inc. Class A Subordinate Voting Shares (HPS.A), ADF Group Inc. Subordinate Voting Shares (DRX), Propel Holdings Inc. (PRL)  All the above stocks have been beaten down over past few weeks, after a strong run. They are now trading at much lower valuations compared to their larger industry peers in Canada and US