Graham (GHM) Earnings

I´ve been late in posting this, but Graham (GHM) came out with earnings last week, that far exceeded my expectations. As I recommended in previous posts, the stock was clearly undervalued during the last sell-off in late October. Subsequently, the stock has rebounded, by nearly 50%, and seems headed to new highs. Below are some highlights from the recent quarter.

As mentioned in a previous post, the key with Graham (GHM) is that the company is in the midst of multi-year upcycle because of capacity expansions at refineries worldwide. So despite fluctuations in the stock price, Graham´s underlying business will be excellent for next 3 years, at the least. Graham is the established leader in it´s industry, and there are very few shares outstanding. I don´t think it pays to sell a hot commodity, like a stock, when supply is low and demand (for the shares) is high. Overall, I am raising this year´s earnings estimates to $1.35 per share from $1.20 per share. At 15X earnings, the stock is not cheap on an absolute basis, but if GHM traded at comparable industry multiples, it would be trading at $25 - $30.

From the recent earnings release:

William C. Johnson, President and CEO of Graham Corporation commented, "The sales potential for our condenser and ejector systems is significant and reflects expansions and facility enhancements in oil refineries and petrochemical production plants worldwide. Based on industry-wide backlog trends of engineering and procurement contractors, which manage refinery and petrochemical projects, as well as industry growth expectations indicated by the record number of shipyard orders for large crude oil and other oceanic vessels, we anticipate market demand could be sustained for several years. Based on our review of industry publications, we believe that there are over 100 global refinery and petrochemical projects planned for development over the next five years."

Note: I believe that translates into a $500 million opportunity for GHM in the next five years. The company is still only at $60 million in annual revenue. So the growth potential here is enormous.

In conclusion, here is the outlook based on Graham´s (GHM) earnings release:

Orders received in the second quarter of fiscal 2006 were $12.8 million compared with $9.1 million in the second quarter of fiscal 2005, a 41% increase. Export orders increased 88% when compared with the same quarter last year, while domestic orders were up 22%. Of the orders received in the second fiscal quarter, approximately 47% were for refinery projects, 27% were associated with chemical and petrochemical facilities, 6% were power related, and 20% were for other industrial and commercial applications. Orders received in the first six months of fiscal 2006 were $33.3 million, a 47% increase over orders received during the first half of fiscal 2005.

Due to the timing of the release of orders by customers, the trend of bookings from quarter-to-quarter is not reflective of the future sales potential for Graham. Rather, Graham believes that a six to 12-month perspective of orders received provides a better indication of demand trends.

As of September 30, 2005, backlog was $30.0 million compared with $18.9 million at September 30, 2004, a 59% increase. Approximately 41% of the backlog can be attributed to equipment for refinery work, 33% to chemical and petrochemical projects, 14% to power generation projects and 12% to a variety of other industrial and commercial applications.

Mr. Johnson added, "Our strategy for growth is to maximize the opportunities of the current cycle and to increase our market share in the Asian and Middle East regions. We believe our core competence is in our ability to engineer vacuum systems and see the potential to expand this expertise in Asia. The growth of Asia and the Middle East regions provide excellent opportunities for Graham."

Comments

[Mark]

Thanks for creating this site. I have been following your pics on the Yahoo message boards for years.