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I wrote Friday about my decision to make what I call a "lateral" move, selling my IHS stock (IHS) and buying 105 shares of Graham Corp. (GHM). Graham is actually an 'old friend' of mine having first written about Graham October 27, 2007, at a split-adjusted price of $46.60, on the suggestion of Doug S., a great and loyal reader of this blog.
I have also owned shares of Graham (GHM) for short periods of time (literally) having purchased 400 shares 11/23/07 at a split-adjusted cost of $49.98 and then selling those shares just 3 days later at split-adjusted price of $52.91. This was a "trade" and not exactly within my usual 'disciplined trading strategy'!
I purchased 210 shares once again 1/10/08 at $46.30, only to find myself losing money this time and unloading shares 1/16/08 when I found myself losing money and the stock trading at $41.30.
They say that 'third time is the charm'. So when looking for a stock to replace my IHS holding, I saw that GHM was on the move once more making the list of top % gainers and I purchased 105 shares at $64.40-- Graham (GHM) closed Friday at $68.44, up $6.69 or 10.83%.
Let's take another look at Graham (GHM) and I will explain why
GRAHAM (GHM) IS RATED A BUY
First of all, what exactly do they do?
According to the Yahoo "Profile" on Graham (GHM), the company
"...engages in the design, manufacture, and sale of vacuum and heat transfer equipment used in the chemical, petrochemical, petroleum refining, and power generating industries worldwide. Its products include steam jet ejector vacuum systems; surface condensers for steam turbines; vacuum pumps and compressors; various types of heat exchangers, including helical coil heat exchangers marketed under the Heliflow name; and plate and frame exchangers."
How did Graham (GHM) do in the Latest Quarter?
As is often the case in the stocks I review, it was the announcement of earnings, in this case 4th quarter 2008 results, that drove the stock higher on Friday. Before the opening of trading, the company reported that fourth quarter revenue grew $1.9 million or 9% to $22.8 million for the fourth quarter the prior year. Net income for the quarter came in at $4.2 million, up 22.7% compared to net income of $3.4 million during the same period last year. On a diluted per share basis this worked out to $.83/share, up 20.3% compared with $.69/diluted share the prior year same period.
The company noted that the backlog increased a healthy 40% to $75.7 million on March 31, 2008, compared with $54.2 million in backlog on March 31, 2007. The company guided the full year 2009 to a 15 to 20% revenue increase.
How about longer-term results?
Reviewing the Morningstar.com "5-Yr Restated" financials on Graham (GHM), we can see that after a dip in revenue from $44.5 million in 2003 to $37.5 million in 2004, the company has been steadily growing sales to $66 million in 2007 and $84 million in the trailing twelve months (TTM).
Likewise, earnings dipped from $0.00 in 2003 to a loss of $(.20)/share in 2004. Since then earnings have grown rather dramatically to $.10/share in 2005, $1.20/share in 2007 and $2.80/share in the TTM. The company also pays a small dividend which was increased from $.06/share in 2003 to $.08/share in 2004 and has held constant at that level. The outstanding shares, while small, are rather stable with 4 million share reported in 2003 increasing only to 5 million in the TTM.
Free cash flow which was a negative $(5) million in 2005, has increased to $4 million in 2007 and $17 million in the TTM.
The balance sheet appears solid with $3 million in cash and $48 million in other current assets. This total of $51 million can easily cover both the current assets of $16.8 million and the negligible $1.8 million in long-term liabilities almost 3 times over. The current ratio is calculated at a healthy 3.03.
What about some valuation numbers on this stock?
The trailing p/e is a reasonable (imho) 23.99 with a forward p/e of only 17.96 (fye 31-Mar-09). No PEG is available (probably because there aren't any analysts out there estimating 5-yr results!).
Looking at a couple of value statistics from the Fidelity.com eresearch website, we can see that GHM has a Price/Sales figure of 3.97, well ahead of the industry average of 1.41. However, this premium in price/sales may be justified in light of the Return on Equity (TTM) figure of 39.16%, well ahead of the industry average of 22.26%.
Finishing up with Yahoo, we can get a feel for how small this company really is when we see that there are only 4.96 million shares outstanding and only 4.33 million of them actually float. As of 5/12/08 there were only 43,430 shares out short representing a very low 'short ratio' of only 0.3 days. This also represents only 0.9% of the float.
According to Yahoo, the company is now paying an increased dividend rate of $.12/share yielding 0.2%. The last stock split was a 5:4 stock split January 3, 2008.
What does the chart look like?
Reviewing the "point & figure" chart on Graham (GHM) from StockCharts.com, we can see the tremendous volatility with the stock moving strongly higher from $18/share in June, 2007, to a high of $61/share in December, 2007, only to plunge back to a low of $28 in January, 2008. The stock has moved strongly higher since January, 2008, to its recent price level at $68.44.
What do I think about this stock?
To summarize, I sold my IHS shares and discussed my rationale and have substituted Graham (GHM) a small cap stock that trades on the AMEX in its place. The company reported a great quarterly report Friday and the stock moved sharply higher. The valuation is reasonable and the company has a strong backlog of sales orders. Unfortunately, the stock is rather thinly traded with an average daily trading volume of only 211,588 shares. This may result in quite a bit of volatility as I have already experienced and may lead to me getting 'shaken out' of this position once again!
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Wishing you all a great week ahead!
Yours in investing,