Graham Corp (NYSEMKT:GHM)

CAPS Rating: 5 out of 5

The Company and its subsidiaries are engaged in the design, manufacture and supply of vacuum and heat transfer equipment used in the chemical, petrochemical, petroleum refining and electric power generating industries.

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Player Avatar rd80 (98.66) Submitted: 9/2/2007 6:34:14 PM : Outperform Start Price: $14.02 GHM Score: +88.57

From the company profile on Graham's website, "Graham Corporation designs and builds vacuum and heat transfer equipment for process industries throughout the world and is a worldwide leader in vacuum technology. Principal markets served include the chemical, petrochemical, petroleum refining, and electric power generating industries, including cogeneration and geothermal plants. Other markets for Graham equipment are metal refining, pulp and paper, shipbuilding, water heating, refrigeration, desalination, food processing, pharmaceuticals, heating, ventilating, and air conditioning."

The customers are all strong markets and Graham sells worldwide. The company has nearly no debt and over $5 a share in cash. Fwd PE is 14.88, there's only one analyst covering the stock, next year's growth is estimated at 17.3%. Operating and profit margins are both in low double digits. Pays a small dividend. The last quarter's report and conference call was a blow-out - estimate was for 28 cents a share, GHM reported 66.

Don't own any of this one, but am considering it.

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Member Avatar ikkyu2 (99.38) Submitted: 12/3/2007 5:42:23 PM
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I bought some the day Cramer recommended FWLT. Basically the same sector and subsector - oil refinery services - no debt, all that cash, low price, and so much work to do that they're having to outsource some of it.

All of that makes it an attractive play to me, but all of those qualities combined, along with the fact that this is a tiny company in a sector with a few much larger companies, suggests to me that it might also be an attractive takeover target.

Member Avatar ddtrader99 (< 20) Submitted: 4/1/2008 3:30:56 PM
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On the day it reported earning, its share dropped and continued next day to hit about $28 from the previous day's high $47 and then recovered some until now. The drop even with blow-out earning was due to margin contraction.

Member Avatar rd80 (98.66) Submitted: 4/5/2008 2:43:59 PM
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On Thursday 3 April, GHM announced record quarterly orders and increased revenue guidance for FY2009. The stock jumped from 36.90 at the open to close at 45.22. On Friday, it tacked on another three and a half plus to close at 48.79. Even after the run up, it’s still only trading at a ttm PE of 17.8. Yahoo Finance shows only one analyst covering the company, that earnings estimate for next year puts the fwd PE at 15.4 and I suspect that estimate will go up based on the company’s new revenue guidance. Management has absolutely blown the earnings estimates away the last two quarters. I see several potential catalysts to drive this stock price higher. With the market cap approaching $250 million, they’re getting to the point where they could pick up more analyst coverage and are big enough for bigger mutual funds and institutional investors to start looking at them. TTM EBITDA is 10.7, but with higher revenue projections bringing that down a bit, they could be attractive as a buyout. The primary risk is that this is a cyclical growth story, so a bad quarter or falloff in the petrochemical business would be pretty ugly for GHM. Steel costs could be a problem for them, but with very strong customer markets, I believe they shouldn’t have much trouble passing price hikes along.The stock still looks like a good buy, even after the run up last week. But, with market volatility, I would look for a pull back before buying. In this market, patience is nearly always rewarded with a better buy point. With the company forecasting 15-20% revenue growth for FY09 and a track record of crushing estimates, I don’t see any reason they shouldn’t trade at a fwd PE of 20+. That would put the stock price well into the 60’s.Disclosure: I have a small position in GHM.

Member Avatar rd80 (98.66) Submitted: 6/10/2008 7:06:22 PM
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Graham Corp. (GHM) issued a press release on Friday, 6 June outlining $10 million in international refinery equipment orders. I thought the release helps explain part of the picture driving oil prices. The orders in GHM’s release are for refinery projects in South Korea, China, Malaysia and Russia. This supports the argument that oil demand is growing outside the US and is keeping upward pressure on crude prices.Graham also got a mention in Barron’s Research Reports section. Singular Research (never heard of them) put a buy recommendation on the stock. I bet Singular’s customers would have been happier if the buy rating had been issued back in Feb so they could have been in on the quick double.GHM also issued earnings on 30 May. CEO was forecasting 15-20% revenue growth over the next 12 months with gross margins slightly lower than what they've been doing. I came up with a 12 month price target range of about 65 - 95. I lean towards the higher end of that estimate given Graham's track recored of crushing earnings estimates. Still like the company, but it's not realistic to expect the price action we've seen over the past few months to continue.I took some profits in my meager stakes a little while ago, now playing with the house's money.

Member Avatar rd80 (98.66) Submitted: 12/2/2008 9:01:03 PM
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Copy of blog entry from early Nov 2008Graham (GHM) is a small company that was just included in the Russell 2000 this past summer. GHM manufactures processing equipment; the big heat exchangers, ejectors and vacuum equipment used in refineries, chemical processing and other process industries. This was by far my biggest dollar and percentage winner from the two Strategy Lab Open rounds. The stock has been very volatile over the past year with a split adjusted 52-week trading range of $12.50 - $54.91. The 6 November close was near the bottom of the range at $14.15.GHM reported earnings for their fiscal 2009 2nd quarter on Mon, 3 Nov. The numbers were only fair and the forecast wasn’t as strong as the market would have liked. Earnings were 43 cents per share, missing analysts’ estimates by 10 cents. CEO Jim Lines added, “Bookings this past quarter were down considerably and totaled $17.5 million. We believe the third quarter bookings may be light as well.”Nearly half of second quarter sales were to the refining industry and much of the business was outside the US. Refineries will continue to need repair, maintenance and upgrades, but it’s tough to imagine that business gaining a lot of strength until the economy starts to improve.Chief Accounting Officer Jennifer Condame presented the order backlog, “At the end of the second quarter, backlog was $69.7 million up 23% compared with $56.8 million at the end of the second quarter of fiscal 2008.” However, the backlog decreased from $76.0 million at the end of the 1st quarter. Still, a nearly $70 million order backlog is great news for a company with a market cap of just over $140 million.During the Q&A, an analyst noted that in past years, bookings for the next year nearly always accurately predicted sales for the year. However, this year, the company’s guidance is slightly below the 2009 orders that were in hand at end of fiscal 2008. Mr. Lines explained that orders aren’t being canceled, but some customers are extending projects.The company has a strong balance sheet and is interested in pursuing acquisitions at the right price. When asked about plans, Mr. Lines stated, “…the acquisition size would be below $100 million, it would be engineered to order products that fit our brand, that are in the energy sector. Now in the energy sector, we are not just talking about oil refining and petrochemical. We are talking about power generation, alternate energy, [waste] energy, geothermal, areas where the Graham brand is exceptionally strong…” GHM has nearly $43 million of cash on the books and virtually no debt. With a balance sheet like that, they don’t need to worry about tight credit markets. But some of their customers do.Oil sands are a potential growth area for GHM, but many of those projects may be on hold at current oil prices. It wasn’t mentioned in the call, but many alternative fuel processes require the type of equipment GHM sells.In both my Marketocracy virtual portfolio and real life, I sold off most of my GHM holdings during the spring-summer run up, but have kept a few ‘trophy’ shares to participate in future growth. GHM does pay a small quarterly dividend, but even with a raise in Sep and the share price drop over the past few days, the yield is below 1%.GHM trades at value stock type multiples with a forward PE below 6. Unlike many companies, the strong backlog and long order-build-deliver cycle make earnings projections fairly believable. Countering that is a weak economy. At prices near $14 a share, the company looks cheap. It may stay cheap or get cheaper, but should be a good stock to average in and wait for the economy to improve. The stock is fairly volatile, so an active trader may be able to do well with it. With over $4 a share in cash and no debt, the company isn’t in any danger of failing. Add in EBITDA of 3.6 and the company might look attractive as an acquisition target.In summary, a former high flying, IBD momentum stock that’s corrected to value territory. GHM probably isn’t in the right business for the present economic cycle, but seems to be very well managed, has an outstanding balance sheet and could turn into a double or triple from current prices when the economy picks up again.All conference call quotes from the transcript at SeekingAlpha.com

Member Avatar rd80 (98.66) Submitted: 11/26/2011 2:12:54 PM
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http://caps.fool.com/Blogs/ikkyu2-challenge-post-graham/672671
Blog from 11/24/2011

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

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