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Graham (GHM) Boosts Defense Business With Barber-Nichols Buyout

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Graham Corporation GHM yesterday announced that it completed the acquisition of Arvada, CO-based Barber-Nichols Inc. The transaction value was $70.1 million. It is worth mentioning here that Graham’s shares gained 4.22%, ending the trading session at $15.31 yesterday.

Barber-Nichols is a specialist in manufacturing specialty turbomachinery for use in space, defense, energy and cryogenics industries. Its product offerings include rocket engine turbopumps, specialized pumps, fans and compressors. Its revenue-generation capacity is $56 million.

Inside the Headlines

As noted, the acquisition price of $70.1 million was settled by Graham through cash of $61.1 million and stock worth $9 million. The company paid the cash portion of the acquisition price with available cash of $41.1 million and funds raised through a term loan of $20 million.

The above-mentioned term loan is valid for five years and was secured as part of Graham’s new credit facility. Interest on the term loan is variable. The other part of the company’s credit facility includes $30 million worth of a revolving credit facility.

The buyout is anticipated to boost Graham’s revenues by 50% and prove accretive to earnings per share in fiscal 2022 (ending March 2022). This can be accomplished through exposure in the defense sector as well as enhanced product offerings and engineering capabilities. Also, roughly 40% of Barber-Nichols’ backlog of $100 million will be converted into revenues in fiscal 2022 and the rest in the years ahead.

On the other hand, the credit arrangement will lower the cost of capital as well as provide liquidity for Graham.

Financial Performance and Projections

The same day, Graham reported its results for the fourth quarter of fiscal 2021 (ended March 2021). Earnings in the quarter were 4 cents per share, lagging the Zacks Consensus Estimate of 12 cents. However, revenues of $25.7 million surpassed the consensus estimate of $24.2 million. On a year-over-year basis, the top line increased 11.3% and earnings per share declined 33.3%.

For fiscal 2022, the company anticipates revenues of $130-$140 million. The projection includes a $45-$48 million contribution from the 10-month operations of Barber-Nichols.

Zacks Rank, Price Performance and Earnings Estimate Trend

Graham currently carries a Zacks Rank #3 (Hold). The company is poised to benefit from its diversified business structure, buyout activities, solid balance sheet and healthy liquidity. However, weak oil prices and the pandemic-related uncertainties are concerning.

In the past three months, the company’s shares have decreased 4.4% compared with the industry’s growth of 11.2%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

The Zacks Consensus Estimate of Graham’s earnings is pegged at 46 cents per share for fiscal 2022 (ending March 2022), suggesting growth of 43.75% from the previous year’s reported figure.

Graham Corporation Price and Consensus

Graham Corporation Price and Consensus
Graham Corporation Price and Consensus

Graham Corporation price-consensus-chart | Graham Corporation Quote

Stocks to Consider

Three better-ranked stocks in the industry are Tennant Company TNC, EnPro Industries, Inc. NPO and Applied Industrial Technologies, Inc. AIT. While Tennant presently sports a Zacks Rank #1 (Strong Buy), both EnPro Industries and Applied Industrial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these stocks have improved for the current year. Further, earnings surprise for the last reported quarter was 82.81% for Tennant, 44.21% for EnPro Industries and 35.64% for Applies Industrial.

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