By: Bruce Murray

We have been accumulating Hammond Power Solutions stock since April as a long-term play on the rising demand for electrical infrastructure that is being driven by Artificial Intelligence (AI) and the electrification of transportation. As a leading manufacturer of dry-type transformers in North America with a reputation built over a century, HPS is well-positioned for the future.

Hammond Power Solutions (HPS) is a key player in the growing demand for electrical infrastructure, a trend fueled by the expansion of Artificial Intelligence (AI) infrastructure and the electrification of transportation. Its transformers are critical components for adjusting voltage levels and ensuring power quality. HPS offers a wide array of standard and custom products, catering to diverse industries such as renewable energy, oil and gas, mining, steel, and water treatment.

Figure 1. Hammond Power Solution Stock has responded strongly to increased needs for electrical supply since our initial purchases.

Source: Refinitiv Workspace

In its recent Q2 earnings release, the company surprised investors with a significant 44% decline in earnings on an 18% rise in revenue. The company attributed the decline to the startup of a new facility in Mexico and significant cost increases, highlighting rising labour and aluminium wire costs (Trump tariffs?) as well as a significant share-based compensation expense of $9.1 million (4.1% of sales). We believe this was a kitchen sink quarter, as revenues are rising rapidly and price increases are being passed on with new orders to offset rising costs. As a result of the second quarter results, the stock has pulled back substantially, providing us with another opportunity to add to our holdings as we see no change to its earning potential and thus our target price. Five years out, we firmly believe that we will be looking at a $200 stock based on earnings in excess of $10 per share and a high-teens P/E multiple.