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Hammond Manufactures Value

May 10, 2013 | About:
Barel Karsan

Barel Karsan

17 followers
Hammond Manufacturing (HMM.A) makes products like transformers, racks, enclosures and casing for the electrical products industry. You might expect a company in this industry to barely earn its cost of capital - and you'd be right. What you might not expect is that this consistently profitable company is a net-net and trades barely over 1/3 of it's book value!

Hammond has net current assets of $40 million against liabilities of $25 million. Meanwhile the stock trades for just $13 million.

In addition, the company has "Land and Buildings" (on which it runs its operations) listed at a cost above $8 million, and carried at a depreciated $4 million. The company also has an interest in a vacant, non-operating property (on which it has accrued some environmental liabilities) which it deems to be worth just over $1 million.

Finally, Hammond also has a 40% interest in one of its suppliers. This is carried on the books at $200K, whereas the supplier generated a profit of $100K last year.

Going back 10 years, Hammond's operating margin has ranged between 0.4% (in 2005) and 5.3% (in 2008). Last year's operating margin came in at 3%, which was good for 16 cents a share. Shares currently trade for just $1.10 each. So not only does this company trade at a discount to its earnings, but the downside appears to be protected not only by net current assets but by substantial land holdings.

Now for the less appealing aspects. The company does carry a decent amount of debt. Though this is factored into the net-net calculation, it does mean that if the assets aren't worth as much as they appear to be, this effect will be magnified for equity holders. Also, the company is controlled through a dual-class share structure.

To read the company's annual report, see here. To read more about the company, see here.

Disclosure: Author has a long position in shares of HMM.A

About the author:

Barel Karsan
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