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Graham Goes Nuclear



December 15, 2010 – Comments (6) | RELATED TICKERS: GHM

As a Graham Corp. (GHM) shareholder, I've been wondering when the company would put some of its sizeable cash stash to work.  The answer came yesterday.  Graham purchased Energy Steel and Supply, a small, nuclear certified, manufacturing company suppling raw materials and products for nuclear power plants.

Graham manufactures heat exchangers, vacuum equipment - big, heavy stuff - to process industries like refiners and petrochemical plants.  It used to be a nuke certified manufacturer and is in the process of getting those certifications again.

Graham bought Energy Steel and Supply for $18 mil with a possible $2 mil kicker based on performance going forward.  GHM will still have a petty cash drawer with $50 million and no debt after the purchase check clears.

During the call summarizing the acquisition, mangement said the price worked out to about 6x EBITDA and 1x sales, a very reasonable valuation.  Management also stated the margins at Energy Steel were about the same as Graham's and that there would be a charge of 7 - 9 cents next quarter (GHM's FY11 third qtr), no impact the fourth quarter and the acquisition would be accretive in their FY12. 

I like what I heard and Graham management sounded very pleased with the combined growth opportunities this deal offers, especially the potential for new US nuclear plants and for expanding Graham's already strong international business base - Energy Steel's business base is nearly entirely in the US.

Apparently, I wasn't the only one who like what I heard.  In a sloppy day in the market, Graham share price went cha-ching to the tune of over 4%.  Very unusual for the acquiring company in a deal to have its share price bid up.

If you're considering buying, please do your own research.  The market cap is under $200 mil (for now anyway), it's pretty thinly traded, can be volatile and has already run about 15% over the last month.

As mentioned, I do own the stock but don't have plans to add to it at this time. 

6 Comments – Post Your Own

#1) On December 16, 2010 at 1:57 AM, ikkyu2 (98.05) wrote:

Thanks for the update.  It is quite unusual to see a pop in an acquiring company, isn't it?  Can't say it was unwelcome though.  I am so pleased to own GHM, it is one of the few in my portfolio that I don't find myself tempted to sell.
I wonder if Energy Steel has some engineering-related IP (intellectual property) holdings, such as patents or something that Graham's larger team can leverage to bring to a wider market.  I had been concerned that winning that large US Navy contract might make them complacent - clearly that's not the case.

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#2) On December 16, 2010 at 8:32 AM, rd80 (95.74) wrote:

They didn't address IP during the call.  I got the impression that the main barrier to entry for competitors to Energy Steel is the time it takes to get production processes certified - although the engineer in me says it's likely some of the production technology is probably protected IP.  That and it's a limited marketplace so building customer relationships would be another barrier to entry.

They did say there's virtually no overlap between the products and customers.  Graham has been working to get nuke certified and I think management sees this as an opportunity to offer a broader scope of supply to any new nuclear plant projects.

Guess I should have added that I have no plans to sell my GHM either. 

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#3) On December 16, 2010 at 9:06 AM, lemoneater (57.10) wrote:

I enjoyed touring this nearby nuclear power plant a few years back. It de-mystified nuclear power somewhat for me.

I think many non-technical people tend to regard nuclear power with supersition. It really is not black magic, but it does produce some hazardous waste.   

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#4) On December 16, 2010 at 9:33 AM, lemoneater (57.10) wrote:

Do we have better strategies for handling nuclear waste than we did in the past?  Is there any micro organism that munches on nuclear waste and turns it into harmless fertilizer, I wish!

I think that plants have many more safety features than before. I would hope that we have learned from Three Mile Island. It seems like energy source and danger go in the same sentence.

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#5) On December 16, 2010 at 12:57 PM, ikkyu2 (98.05) wrote:

You ain't kidding about the regulation, Russ.  I participated in a hospital plan to - one day - be permitted to inject radioisotopes on demand in a big academic medical center.  2 years and countless meetings with NRC wonks later, the project was no further along than it had been.  5 years since then, and it is still 'in the works'.

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