Hammond Mfg. has a market capitalization of 15 m CAD, no visible long-term competitive advantage, a controlling investor, which is not shareholder orientated, and earns little money. A price/NCAV = 1 and a PB-ratio = 0,5 are the reasons why I take a closer look at the company anyway.
After the post “Small vs. Large Caps” I wanted to engage myself more often with smaller companies. Today I would like to introduce such a company to you. I heard about it on one of my favorite English sites (Oddball Stocks). Hammond Mfg is an oddball stock. With a market capitalization of just 15 m CAD, it is a Micro Cap or rather a Nano Caps as Wikipedia taught me.
Cheap assets, bad profitability
Hammond Mfg. is located near Toronto, Ontario, in a small suburb. They produce electronic enclosures, outlet strips and transformers. This is a business with no moat. For each of their product categories there are at least half a dozen Chinese manufacturers that are cheaper. Nonetheless, Hammond Mfg. has a sales margin of approx. 2 %. What makes the company interesting for value investors is its cheap valuation. However, we are talking here about an investment style à la Graham not Buffett.
Valuation figures based on the 2012 balance sheet:
The cheap asset valuation is particularly interesting for me. A price/NCAV of 1 states that the short-term assets (cash, receivables, inventories) are sufficient to cover all liabilities as well as the current market capitalization. Long-term assets of 16 m CAD are for free. I cannot say how much they are really worth. However, they include buildings with a purchase price of 8,5 m CAD (balance sheet: 3,7 m CAD). Hence, I do not think that they are worthless. Because of the low return, by investing in Hammond Mfg., one gets the inventory, cash and assets for half the price. However, an investment is not lucrative based on the profitability.
|ROS and ROE (in m CAD)|
|2012||1.7||92.4||1.8 %||30.8||5 %|
|2011||1.8||85.5||2.1 %||29.5||6 %|
|2010||2.3||78.6||2.9 %||27.7||8 %|
|2009||0.0||69.4||-0.1 %||26.7||0 %|
|2008||4.9||78.2||6.3 %||26.7||18 %|
|*2007||0.2||73.1||0.2 %||21.9||1 %|
|2006||1.2||71.0||1.7 %||21.6||5 %|
|2005||-0.4||67.2||-0.6 %||20.4||-2 %|
|2004||0.2||59.5||0.3 %||20.8||1 %|
|2003||0.0||56.6||-0.1 %||20.6||0 %|
|Average||2 %||4 %|
|* sale of Moloney Electric|
Payout should be 100 % - but it is not!
Also the disbursement is not worth mentioning. Despite this low valuation and the low return which both calls for a payout ratio of 100 %. The annually 0,02 Cent of the last three years are not even 15 % of the profit. The main reason lies in the owner structure. Robert Frederick Hammond owns approx. 64 % of all shares with voting power due to B-Class Shares and the Eramosa Group Limited. He is in favor of a strong stakeholder orientated management style. This means all stakeholders are considered: customers, shareholders, employees and suppliers. I think a management style like this is very good. However, it reduces the return for shareholders.
|Payout ratio (in CAD)|
|Average (3 years)||12 %|
If you take a look at my Easy Buffett calculation, you see that there is not much to gain. Even if one assumes that the valuation of the P/E rises from 9 to 10, the return on a ten year investment perspective does not even succeed the return of a long-term corporate bond.
|Book value in n years||3.79|
|Profit in n years||0.15|
|Price in n years||1.52|
|Sum of dividends in n years||0.21|
Explanation of the Easy Buffett (only in German).
At the moment this company is only interesting for me in respect of inflation. I heretically call it the better gold or the better German real estate. If one assumes that the inflation (especially in the Euro area) will increase in the next years, one could diversify ones risk similar as with gold or German properties. The assets of Hammond Mfg. are very cheap compared to gold or German real estate. They are sold for half the book value. Moreover, they are profitable in contrast to gold and are located mainly in Canada compared to German buildings. Within an Euro-inflation scenario one has cheap assets in a strong currency area.
However, I did not buy Hammond Mfg. Mainly because I am a follower of Warren Buffet, who invests in companies with an extraordinary ROE and is willing to pay more than the book value for it. Though, I like the idea of Benjamin Graham to invest in companies with a bigger NCAV than market capitalization. Another problem for me are the trading fees of approx. 50 Euro per trade if I buy a Canadian Nano Cap.
The shares are not cheap enough for me because the price of Hammond Mfg. was in between 0,92 and 1,40 CAD last year and is currently at 1,30 CAD. If the price drops below 1,00 CAD (0,75 price/NCAV), I would reconsider an investment.
What is your opinion on the company respectively on my conclusions?