When investors think about the data centre boom, artificial intelligence (AI) usually becomes the obvious investment angle. However, none of these facilities can run without the proper electrical infrastructure required to handle enormous power demands.
This rising demand is opening new opportunities for transformer and other electrical product makers like Hammond Power Solutions (TSX:HPS.A), or HPS. The company is already seeing the impact through higher sales and a growing order backlog, while rising U.S. data centre investment is becoming one of its key growth drivers.
In this article, I’ll explain why the ongoing data centre buildout could boost Hammond Power’s long-term growth outlook.
Source: Getty Images
Hammond Power stock
Based in Guelph, Hammond manufactures dry-type transformers, power quality products, related magnetics, and power conversion systems. Its products are mainly used in electrical distribution networks serving data centres, mining, oil and gas, commercial construction, wind power, and several other industries.
After more than doubling in value over the last year, the stock now trades at $262.15 per share with a market cap of $2.4 billion. It also offers a small dividend yield of around 0.4% at its current market price.
The recent rally in Hammond stock becomes easier to understand when you look at what is driving the business. Data centre investment has become an important source of demand in the U.S., along with electrification and broader spending on power infrastructure.
Data centre demand is showing up in its numbers
Interestingly, the data centre boom is no longer just a long-term opportunity for Hammond Power Solutions. The company is already seeing the positive impact of this trend on its financial performance.
In the second quarter, HPS sales climbed nearly 45% year-over-year (YoY) to a record of $324.8 million. Its U.S. and Mexico sales jumped 73% YoY to roughly $273 million. Higher data centre shipments were a major driver of that growth, along with modest improvements in industrial markets and better price realization.
Although its home market sales fell 23.7% YoY due partly to the timing of large custom projects, its profitability moved in the right direction in several areas. The company’s gross margin in the latest quarter expanded to 31.5% from 30.7% a year ago with the help of higher pricing.
Hammond’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) also improved 59.4% YoY to $53.2 million, driving its adjusted earnings to $2.76 per share from $1.72 a year ago.
Why Hammond’s growth runway still looks interesting
Even after record shipments, Hammond Power continues to have a large amount of work lined up. Its second-quarter backlog was close to 97% higher than a year earlier, driven mainly by large project orders tied to data centre activity. Although its backlog fell sequentially because shipments exceeded new order bookings, it remained at historically high levels.
HPS has also been expanding its manufacturing capacity to keep up with stronger demand. Its newer Mexican facility is already contributing to better operating leverage, while broader capacity investments should help it improve lead times and respond more quickly to customers.
Recently, on June 29, Hammond Power Solutions completed its acquisition of AEG Power Solutions, which should contribute positively to its financial growth in the years to come.
Overall, Hammond Power gives investors direct exposure to the electrical infrastructure needed to support data centre expansion. And its record sales, stronger adjusted earnings, added manufacturing capacity, and historically high backlog make it an attractive Canadian growth stock to buy as data centre investment continues.
