Expanding Production In Mexico And Acquiring Micron Will Increase Custom Transformer Output

Key Takeaways

• Expansion in Mexico and acquisition of Micron boost capacity, enhance competitiveness, and potentially improve future revenue and net margins.
  
• Shifting toward higher-margin custom products could increase earnings, supported by rising demand in sectors like electrification and mining.
  
• Reliance on expansion projects and share-based compensation increases could impact net margins and earnings amid demand softness and competition pressures.

Catalysts

Engages in the design, manufacture, and sale of various transformers in Canada, the United States, Mexico, and India.

• Hammond Power Solutions is investing an additional $20 million in expanding production in Mexico to build custom power transformers, which will increase revenue capacity by more than $100 million and is expected to be operational by early 2026. This should boost future revenue and potentially net margins by alleviating capacity bottlenecks and enabling increased sales of higher-margin custom products.
  
• The acquisition of Micron Industries enhances Hammond's ability to serve U.S. and North American customers, potentially expanding its access to original equipment manufacturer (OEM) markets, which could drive future revenue growth and improve net margins through a broader product portfolio and economies of scale.
  
• Expansion of the distribution channels in North America is anticipated to increase sales volume over time, supporting expected growth in future revenue, especially as new distributor branches have a ramp-up period followed by increased in-branch proportion of spend.
  
• Hammond is enhancing its capacity to meet demand faster, which could reduce backlog and increase competitiveness, particularly in the OEM sector. This could positively impact future revenue growth as shorter lead times could attract more customers.
  
• Growing demand in custom products and infrastructure support, such as the electrification drive, data centers, EV charging, and mining, might continue to shift the product mix toward higher-margin custom products, positively impacting future earnings and net margins.

Hammond Power Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hammond Power Solutions's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.8% today to 8.3% in 3 years time.
• Analysts expect earnings to reach CA$78.6 million (and earnings per share of CA$7.88) by about February 2028, up from CA$67.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the CA Electrical industry at 6.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Hammond Power Solutions Future Earnings Per Share Growth

Risks

• Forward-looking statements mentioned in the call highlight numerous risks and uncertainties, suggesting potential variability in future financial performance, impacting both revenue and earnings.
  
• The softness in demand for standard products, particularly in the U.S. commercial construction and industrial markets, raises concerns about consistent sales growth, potentially affecting future revenues.
  
• Hammond's reliance on new plants and expansion projects, such as those in Mexico, entails risks related to execution delays and capital deployment, which could influence net margins and earnings if not efficiently managed.
  
• Fluctuations in commodity prices and industry competition could impact the company's cost structure and pricing strategies, thereby potentially compressing net margins.
  
• Share-based compensation has increased significantly, which may affect net earnings if not managed relative to revenue growth.

Valuation

• The analysts have a consensus price target of CA$164.0 for Hammond Power Solutions based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$949.7 million, earnings will come to CA$78.6 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of CA$92.82, the analyst price target of CA$164.0 is 43.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.