Hammond Manufacturing is a Canadian company located near Toronto, Ontario. The company's address is in a small town, but appears to be about five freeway exits from the suburbs. They have locations worldwide including the UK, Australia, and Taiwan. The company produces enclosures, such as electrical box enclosures, enclosure racks, outlet strips and electrical transformers. The business qualifies as boring, I can't imagine anyone getting excited about industrial electrical box enclosure technology. I'm not even sure the word technology should be used, most of the company's products are bits of metal twisted in different directions.
Anyone looking for a moat isn't going to find it with Hammond, their net margin is around 2%, and I'd be surprised if there wasn't a Chinese competitor who manufactured each of their products. Yet in the face of producing a commodity item the company has been able to remain profitable in recent history, with the exception of 2009. In 2009 the company reported a small, $44k loss.
I pulled the company's sales, earnings and book value from their earnings releases on their website going back to 2007:
If Hammond were trading at book value or above the company wouldn't attract my attention, their results are average at best. But with the stock trading below book value, and below NCAV I'm much more interested.
The company's current assets consist mostly of inventory and receivables. The company's inventory is almost entirely finished products, presumably waiting to be shipped to customers or distributors. The company doesn't have much cash on hand, but this isn't surprising given that they also have some debt.
The company is selling for 88% of NCAV, a strictly mechanical investor might consider this over priced since it's selling for more than 2/3 of NCAV, and would potentially sell at NCAV. I'm not mechanical by any means, and I can see that there's a lot of opportunity here besides a straight NCAV play.
The company has a fairly sizable property holding, they hold almost $9m worth of land and buildings at cost. They also own a 50% equity stake in a piece of property in Georgetown, ON. The Georgetown property is undergoing environmental remediation, but they company plans on developing it when finished.
The company's assets are like the rest of this company, nothing spectacular, but worth much more than the market is pricing them at. The assets, especially the current asset coupled with the company's profitability history is what gives Hammond value.
Hammond has earned respectable profits since 2007, sales took a dip during the crisis but have recovered and grown. The company's profits have remained mostly flat, but they've been able to grow book value. I've discussed in the past how an average company with a growing book value can be a great investment, Hammond qualifies in that regard. The company has grown book value at 6.7% over the past six years. On the surface that figure isn't all that impressive, but investors have the opportunity to invest at 44% of book value. Investors are buying $2.71 worth of assets for $1.19, meaning their 6.7% growth is actually 15% growth on an investment at the current price. If the company performs in the future like they have in the past I will own something that is appreciating on my investment at 15% a year, a return I'm satisfied with.
While the company has a considerable margin of safety in regards to both market price to NCAV and book value, any discussion of the company should include a look at their liabilities.
The company carries $10m of bank debt which they use to finance their inventory. They also have a number of operating leases on their factories and warehouse locations. For the first six months of this year the company's interest costs were covered 10x by operating earnings, which is a considerable buffer.
In summary there is nothing spectacular about Hammond except for their price. The company is profitable and has been growing book value consistently, yet the market seems to believe they're only worth 44% of stated book and 88% of NCAV. Even with a liquidity discount, and an insider ownership discount it's hard to justify a low valuation like this. I'm happy with the discount the market is handing out, and I picked up shares when I first discovered the company. Hammond Manufacturing fits well in my portfolio.
Disclosure: Long Hammond