Hammond Power Solutions Inc (TSX:HPS.A), despite COVID-19, raised its dividend in 2020 and is currently yielding more than 4%
Harvi Sadhra, Hashtag Investing | December 8, 2020 | SmallCapPower: When a company has been around for more than a century, you know it’s a survivor. Canada-based Hammond Power Solutions Inc (TSX:HPS.A), established in 1917, has seen WWII, the Space Race, the Cold War, and multiple technological revolutions. It has endured and thrived. The COVID-19 is the latest in a line of challenges that the company has encountered.
Hammond deals primarily in various types of transformers and has its manufacturing operations spread across Canada, the USA, Mexico, and India. With a market capitalization of almost $90 million, Hammond stock has been on a roller coaster ride this year with the stock price finally coming close to its 52-week high.
Missed earnings estimates
Hammond released its results for the third quarter on October 22, 2020. The numbers didn’t blow anyone out of the water but they were decent enough considering the environment in which the company has been operating in 2020. Overall sales for the quarter were $78.11 million against $91.5 million in the same period in 2019, a drop of 14.6%.
Its Board opined such a drop was due to the pandemic-related conditions, which had affected the markets and led to a massive economic depression in most of the regions where it operates. The year-to-date sales in the US dropped 8.3% compared to 2019.
Canada’s numbers dropped by 8.4% since 2019 but increased by 31.5% since the last quarter. The Indian market saw a massive 36% reduction compared to the same period last year. Bookings in India & America decreased by 20.2% compared to Q 3 of 2019.
Direct sales/OEM sales channels saw a 43.7% decrease in bookings while distributor channels saw a 2.3% increase. The pandemic has brought a sense of volatility in the market and the management feels such unpredictability and volatility may continue to affect its long-term booking rates as well.
However, the Company’s net earnings fell by only 3.7% compared to 2019 and by 6.1% for the first nine months of the year compared to 2019.
Some positive aspects noticed in the financials
Despite all the revenue misses, the quarter saw some positive improvements as well. The gross profit (GP) ratio improved to 27.5% compared to 24.9% in Q3 2019. Hammond said it worked on certain factors like an improved product mix, market selling price realization, the low procurement cost of raw materials, betterment in cost management skills, and also because of the wage subsidy benefit received from the Canadian government in its second and third quarter.
EBITDA also saw a positive change from last year by 5.2%. Selling expenses decreased by $1.53 million compared to last year. However, if measured as a percentage of its sales then it can be seen the cost had increased by a small margin. It was the same with general expenses.
The reduction in cost, especially in Canada, was possible because of the subsidy provided by the Canadian government, so one cannot say the company’s cost management skills have gotten better.
Earnings per share (EPS) improved by about 11.1% compared to the third quarter of last year and by a total of 19.4% in comparison to 2019. Another good thing is Hammond, despite all these economic adversities, managed to generate free cash flow of $11.6 million. Net cash flows increased by $10.2 million during the year. The non-cash working capital also increased by $11 million.
Uncertainty in future operations
Hammond management was unable to prevent business disruptions caused by the pandemic. Various factors like quarantine of the employees, travel restrictions, and lockdown situation significantly reduced its sales. The management estimates these situations may have a material impact in their next few quarters as well.
The anticipated benefits of all the acquisitions, divestments, joint ventures, and other strategic decisions made previously would now take a longer period to materialize.
Having their operations spread across the globe with about 70% of operations outside Canada and given the sensitive nature of the business makes it prone to several countries based on social and political risks as well. However, in spite of all these unfavourable circumstances, its Board is optimistic about the future.
The UK is set to roll out a vaccine in the second week of December. In the US, President-elect Joe Biden has said that he will commence an attack on a war-footing against the virus when he takes over in January 2021. Countries like India are opening up after a really tough lockdown across the country. Companies have reported better-than-expected results for FY21 and it seems like the economy will get back on track.
Hammond’s stock is currently paying a dividend yield of 4.6%. Investors expect good returns from their investments. Dividends bring a sense of security among investors. In fact, the Company actually raised its dividend by 21% during 2020.
Hammond is a renowned company and has been providing quality services now for more than 10 decades. Although their financials and their operations did take a back seat during the past few months, the tide might just be beginning to turn.
Harvi Sadhra is the CEO and Founder of Hashtag Investing. Hashtag investing is an exclusive community for active stock investors to get real-time feedback and discover compelling stocks and strategies any time. With over 5000 global members, Hashtag Investing is growing to become the highest quality online network of investors. www.hashtaginvesting.com
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