rd80 (99.12)

ikkyu2 challenge post – Graham Corp. Analysis

November 24, 2011 – Comments (4) | RELATED TICKERS: GHM

Earlier this month, fellow Fool ikkyu2 issued a challenge to post a stock ‘buy’ analysis sometime in November.  Here’s mine –

Graham Corporation (AMEX: GHM)

Summary:

Market Cap -  $206.5 million
PE (ttm) -  17.34
Business description -  From Q1FY2012 Investor Fact Sheet  “Graham Corporation is a global designer, manufacturer, and supplier of custom engineered ejectors, pumps, condensers, vacuum systems, and heat exchangers. Graham Corporation’s subsidiary Energy Steel & Supply Co. is a leading code fabrication and specialty machining company dedicated exclusively to the nuclear power industry.”
Primary markets - Oil and Gas Refining, Chemical/Petrochemical, Nuclear Power Generation and Other Power Generation
Net Income & Revenue (ttm) -  $103.8 mil & $11.9 mil

Some reasons why it’s a buy:

The challenge asked us to dive into company balance sheets; easy with Graham.  Even though Graham operates in a capital intensive business, the company has no debt and a current ratio of nearly 3.

The time to accumulate an industrial like Graham is before the economy takes off.

About half of Graham’s sales come from outside the US.  As emerging markets emerge, consumption of refined products will increase, which increases demand for Graham's products.

Legislative pushes to regulate CO2 will drive demand for power sources that don’t generate it.  Like it or not, nuclear is one of the few ways to get commercial scale power plants that don’t create greenhouse gas.  Graham’s acquisition of Energy Steel last year positions it as a nuclear power supplier.

Although alternative energy isn’t currently a key Graham market, many of the power production and alternative fuel production processes need the type of equipment Graham produces.

An enterprise value/EBITDA ratio of just under 8 combined with net cash on the balance sheet puts Graham in a range where it could become a takeover target.

Some reasons why it’s not a buy:

At 17 times trailing and 15 times this fiscal year’s estimated earnings it isn’t exactly cheap.  Wednesday’s close is just about the middle of the 52-week price range.  It needs some earnings growth to justify those multiples.

If European finances and a weak US economy trigger a global recession, Graham will be hard pressed to generate much growth.

The stock can be quite volatile and sports a beta of 2.3, meaning its price moves would be expected to be roughly double the percentage moves of the broad market.

Conclusion:

I know the challenge was to write ‘buy’ cases, but I’m hard pressed to call Graham a screaming buy at this price level.  It is a great candidate for a watchlist to wait and see if market volatility might offer it up at a discount to current prices.  Graham is a good candidate stock for investors who can tolerate some volatility and have the patience to wait out the sluggish/slow/no growth.

Disclosure: 

I’m long GHM, have no plans to sell and am watching to add to the position if we get a bit more of a pullback.

Turkey is on the grill and I'm signing off to get a fresh beer and go check the coals.

Fool on and Happy Thanksgiving! 

Russ