Graham (GHM) Follow-Up

I just received a call from a friend who mentioned to me that an investor in GHM sold stock because after he analyzed the financials it appears that the sales at GHM are falling.

Perhaps this particular individual was comparing GHM sales in fiscal Q1 2006 to Q4 2005. If that is the case, GHM´s sales did decrease from Q4 2005 to Q1 2006, but that has always been the case at GHM. For various reasons, traditionally GHM reports a huge Q4 ending March, and then sharply lower results in the next two quarters.  This is purely an artifact of previous management practices and bears absolutely no relation to current growth and futured expected results.  The new CEO will change this, but he is still relatively new to the company, and it will take time to change past reporting practices.

More importantly, and this bears repeating, GHM is involved in long-term projects. These projects do not take a day to complete. They take years. GHM recognizes revenues from these projects on a percentage of completion basis, which allows them alot of latitude when reporting quarterly revenue numbers. The key number to look at when dealing with companies that have long-term projects is backlog. If backlog is up, you can be sure earnings will be super in the coming quarters. How the company recognizes revenues quarter to quarter is meaningless, though it helps if they try to smooth out results.

Furthermore, when companies decide to invest billions of dollars in cap-ex, they don´t just cancel these projects because the stock market is down. And you can be sure that nobody is cancelling planned refinery upgrades and cancelling huge projects because of a slight dip in oil prices and a dip in GHM´s stock price. As such, GHM´s recent stock movement in the last few weeks, bears little resemblance to what is truly going on in the refinery cap-ex "real" world. This refinery cap-ex boom will last for several years, and GHM´s stock will go up and down wildly during that time (more up than down). If you hold on for the ride and buy on dips, you will make money.