THR - Thermon Group: Warming Up To This Heating Play

2024-01-04 10:44:13 ET

Summary

• Thermon Group is a diversified industrial technology company with organic growth accelerating thanks to the energy transition.
• The company serves a wide range of markets, including the energy sector, chemical, power generation, and commercial and industrial applications.
• Thermon started 2024 with a substantial acquisition, acquiring Vapor Power, which will boost sales by about 10%.

I have not yet covered shares of Thermon Group ( THR ) on the platform, yet as the business started the year 2024 with a substantial deal, it is time to look at the company and its shares.

I like what I see as Thermon plays an important and diversified role in the energy transition, with organic growth accelerating. As the company trades at a non-demanding earnings multiple, while leverage is quite modest, Thermon looks like a decent long term investment opportunity.

All of this looks quite interesting as the business started 2024 with a substantial deal, making the situation look quite interesting, as this makes me compelled to initiate a modest position, with the intention to expand this over time.

A Diversified Industrial Technology Company

The paragraph header is the mission statement of Thermon. Founded in 1954, Thermon initially introduced heat transfer cement, and over time has expanded the business, only to go public in 2011. As of today, the company serves over 10,000 customers with its heat related products, employing nearly 1,500 workers.

The company serves a wide range of addressable markets. This includes the upstream, midstream and downstream energy sector, chemical, power generation, commercial and industrial applications as well. Most revenues are tied to what is called heat tracing, which includes cables, transfer compounds and control & monitoring solutions, among others. This key product category is complemented by heating system, transport of heating, temporary power solutions, tubing bundles and power blanket.

Initially trading in the teens, shares rose to the mid-twenties in 2012 and ever since have largely traded in a $15-$30 trading range, despite growth seen in the business, and despite the potential of the business to play an important role in the energy transition. Growth has been solid as the company has grown sales by about 80% since 2017 to $475 million on a trailing basis, with 2026 revenues seen up to $600-$700 million.

A Valuation Discussion

In May of last year, Thermon posted its fiscal 2023 results. Revenues for the year were up a quarter to $440 million and change, with revenues trending at a near $500 million run rate based on the fourth quarter results. The company posted GAAP operating earnings of $55 million, resulting in GAAP earnings of $33 million, equal to exactly a dollar per share. Adjusted earnings even came in at $1.56 per share for the year, with adjustments looking quite fair.

The company guided for modest growth in the fiscal year 2024, with sales seen between $455 and $485 million, with adjusted earnings seen between $1.66 and $1.82 per share.

After posting a 12% increase in first quarter sales, the company hiked the midpoint of the full year sales guidance by five million to $475 million, with adjusted earnings seen at a midpoint of $1.76 per share.

In November, Thermon posted a 23% increase in second quarter sales, prompting the business into hiking the full year sales guidance to $488 million, with earnings seen at a midpoint of $1.89 per share. Net debt was down to $80 million, for a mere 0.8 times leverage ratio, as EBITDA runs around a hundred million.

It were these strong results which propelled shares to rise from levels in the low twenties early in 2023 to current levels of $32 per share, trading near their highs. With 34 million shares outstanding, the company commands a $1.09 billion equity valuation, or $1.17 billion enterprise valuation. This values the business at 2.4 times sales, with equity of the business trading around 17 times earnings. The stronger growth is attributed to growth in decarbonization and electrification projects, boding well for the growth of the business.

A Deal

Thermon started 2024 with a rather substantial acquisition. The company has reached a deal to acquire Vapor Power, a provider of industrial process heating solutions, which includes electronic, electrode and gas-fired boiler technologies.

The deal adds about $50 million in annual sales, about 10% to pro forma revenues. The deal is set to be accretive to earnings per share, but this accretion has not been quantified, nor has the purchase price been announced.

Concluding Remarks

Weighing it all together, I am warming up to Thermon here, as demonstrated by the stronger organic growth reported. The business has multiple tailwinds which support the business, mostly related to decarbonization and smarter generation and use of heat. Despite trading towards the higher end of the historical trading range, with shares previously trading near these levels a decade ago, valuations are relatively modest and so is its debt load. Given all of this, current levels look largely fair, even as shares have run up quite a bit in 2023.

The deal with Vapor will boost sales by about ten percent, and while there is little information provided, it secures growth on top of the organic growth reported, while leverage ratios remain in check in all likelihood.

Given all of this, I think that shares look quite appealing, certainly if shares might see some dips. Even more M&A on the buy side, but over time perhaps interest from a strategic buyer into the business itself, can not be ruled out in its entirety as well. Ironically, there is a small risk as well. Many of the company's current customer groups might be impacted from electrification and changed business models, and might be transformed or go extinct because of these changes, but for now the opportunities seem to prevail over the risks.

Given all of this, I am initiating small here, with an intention to learn more about the business and to add to this position over time.

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