Stock Analysis

Here's Why I Think Hammond Power Solutions (TSE:HPS.A) Might Deserve Your Attention Today

TSX:HPS.A
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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Hammond Power Solutions (TSE:HPS.A). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

View our latest analysis for Hammond Power Solutions

How Fast Is Hammond Power Solutions Growing?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, Hammond Power Solutions has grown EPS by 7.8% per year. While that sort of growth rate isn't amazing, it does show the business is growing.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Hammond Power Solutions's EBIT margins are flat but, of some concern, its revenue is actually down. And that does make me a little more cautious of the stock.

In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.

earnings-and-revenue-history
TSX:HPS.A Earnings and Revenue History June 7th 2021

Since Hammond Power Solutions is no giant, with a market capitalization of CA$118m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Hammond Power Solutions Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Hammond Power Solutions shares worth a considerable sum. To be specific, they have CA$40m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 34% of the company, demonstrating a degree of high-level alignment with shareholders.

Should You Add Hammond Power Solutions To Your Watchlist?

As I already mentioned, Hammond Power Solutions is a growing business, which is what I like to see. Just as polish makes silverware pop, the high level of insider ownership enhances my enthusiasm for this growth. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. What about risks? Every company has them, and we've spotted 3 warning signs for Hammond Power Solutions you should know about.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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