When Mr. James R. Lines, President and Chief Executive Officer of Graham, recently said, “We were careful not to add excessive fixed costs while we rapidly grew during the last couple of years. We believe that our strategy to adopt a flexible cost model while driving improvements will aid us during a pull-back in our markets. We believe that we are better positioned than we have ever been to address a potential slowdown in our markets,” Tom Vass, of the Technology Stock Advisor, was listening intently.

 

Vass follows a patented technology stock selection method that carefully tracks what technology companies are doing with their free cash flow. Total cash flow from operating activities for GHM increased to $19,702,000 in 2008 compared to a year end of $5,193,000 for 2007.

 

“Empirical research on technology innovation,” said Vass, “shows that cash flow and retained earnings are the single greatest sources of growth capital for technology innovation.”

 

In the case of Graham, capital expenditures for the fiscal year ending March 31, 2009 are expected to be in the range of $1.8 to $2.2 million, of which approximately 33% will be allocated for machinery and equipment, 53% for information technology and 14% for other expenditures. An estimated 68% of the fiscal 2009 capital spending is expected to be used for productivity improvements and the remaining 32% for capitalized maintenance and other general purposes.

 

Mr. Lines describes Graham as a global designer and manufacturer of custom-engineered ejectors, liquid ring pump packages, condensers and heat exchangers. “Our equipment is for critical applications in the petrochemical, oil refinery and electric power generation industries, including cogeneration and geothermal plants. Our equipment can also be found in diverse applications such as metal refining, pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, food processing, pharmaceuticals, heating, ventilating and air conditioning,” he added.

 

Vass does not simply see an oil stock, when he looks at Graham. “GHM is perfectly positioned in the global value chain to provide high tech equipment to the coming green technology revolution,” said Vass. “Their products are the essential building blocks to the production of every other form of “green” energy.”

 

As Lines pointed out, “We believe the principal market drivers that have led to increased capital spending by our customers and that are contributing to our sales growth include an increased demand for geothermal electrical power plants to meet increased electricity demand.”

 

International sales accounted for 37% and 33% of total sales for the second quarters of fiscal 2009 and fiscal 2008, respectively. International sales increased $1,450 in the current quarter compared with the three-month period ended September 30, 2007 with increases of $2,498 and $1,242 from the Middle East and Western Europe.

 

GHM sports an EPS of $1.77 and pays a dividend yield of .67%. Vass declined to provide his upside sell target on GHM, suggesting that interested readers review the 10-year stock chart and reach their own conclusions.

 

“If you buy under $13, to paraphrase Thomas Jefferson,” said Vass, “you will have a wolf by the ears and you will need to hold on because you may be tempted to let go too soon.”