Hammond Power Solutions Inc. (TSX:HPS.A) has a decades-long history of magnetic transformer design and manufacturing. But it’s only in the last few years that this company has hit investors’ radar screens. Today, this is a dirt-cheap Canadian growth stock worth considering investing in.
Let’s take a closer look at Hammond Power Solutions.
What exactly does Hammond Power do?
A transformer is a device that transfers electric energy from one circuit to another, either increasing or decreasing the voltage. A dry-type transformer is a transformer that uses air or gas to cool itself. This compares favourably to the alternative of a liquid oil cooling system, as the absence of flammable oil significantly minimizes the risk of fire. This makes it safer for indoor usage in places like hospitals.
The market for these transformers is not insignificant, as the demand comes from a variety of industries. These include oil and gas, mining, steel, waste and water treatment, commercial construction, data centres, and wind power generation.
The growth story
In the five years ended December 2024, Hammond Power saw its annual revenue increase 145% to $788 million. This represents a compound annual growth rate (CAGR) of more than 19%. Also, its earnings increased 360% to $6.01 in 2024. This represents a CAGR of 36%.
All while operating a high margin business that has been generating a return on equity (ROE) in excess of 25%, a return on investment (ROI) in excess of 20%, and a return on assets (ROI) in the high-teens percent. These returns have been achieved in a conservative, low risk business model, with the company holding little debt and generating strong cash flows.
This Canadian growth stock remains cheap
Hammond Power’s stock has rallied more than 1,300% since the end of 2020. This should come as no surprise given the growth that the company has achieved in recent years.
Yet, the stock remains dirt-cheap, trading at 17 times this year’s earnings and 15 times next year’s earnings. Also, it’s trading at a mere 10 times cash flow and 4 times book value. In my view, a quality growth stock like this is deserving of a higher valuation.
Looking ahead
On the company’s first quarter conference call, management expressed optimism about the future. This optimism was driven in part by the strong posted backlog in the quarter. In fact, it increased 18%, as demand from data centres continued strongly. Also, Hammond’s capacity expansions are nearing completion, and they bring additional room for growth as well as increased efficiencies.
As we look ahead, we can expect Hammond’s transformers to continue to be in demand as electrification continues. Notably, transformers are a central component in the electrification process, as they make electricity usable by lowering the voltage at the point of use.
Last year, Hammond announced the acquisition of Micron Industries, a leading supplier of control transformers. This acquisition is providing Hammond with additional scale, an additional customer base, and access to a state-of-the-art manufacturing facility. This facility provides quality and flexibility for customer orders.
The additional opportunities from this acquisition will drive revenue growth and efficiencies for Hammond. In terms of future acquisitions, the company is in talks with various acquisition opportunities. With its strong balance sheet and industry-leading position, this growth will be well-supported and value-enhancing for shareholders who have invested in Hammond.
The bottom line
Hammond Power stock is a little-known growth stock that remains dirt-cheap. It’s not too late to consider investing in this gem.
