Powell Industires and Marmion Industries: A Match Made In Heaven?

Powell Industries (NasdaqGS: POWL) brought about $2.5M worth of sales through Marmion’s doors in 2007 and holds the potential to make that seem like a drop in the bucket in years to come.

If Marmion can continue to diversify its product offering and increase manufacturing capacity, the emerging HVAC provider should be able to grow right along with its biggest customer for the foreseeable future.

MMO: Plenty of Room To Grow with Top Customer

POWL has nearly doubled their annual revenue since 2005, reaching $564M in 2007.

The company is currently segmented into two groups: Electrical Power Products and Process Control Systems. The former, which according to the company’s annual report logged $546.1M in 2007, the lion’s share of corporate revenues, serves a deep base of customers in Marmion’s core target market making the two entities a perfect match.

“operators of oil and gas pipelines, refineries, petrochemical plants, and electrical power generators; public and private utilities; operators of co-generation facilities; mining/metals companies, pulp and paper plants operators, transportation systems operators, and governmental agencies and other industrial customers” Yahoo Finance, Business Summary

Although expanding and diversifying the customer base is a key strategic goal of the company, since Powell does bring in more than $500M a year in sales, MMIO can clearly benefit from a deeper relationship with its top customer going forward.

Volume Trending Up on Light News.

In regards to the stock (3 month chart above and to the right), volume has been trending upwards in recent weeks, as well as the average closing price. With Q1 financial reports due out just around the corner and a new facility being built, the market finally appears to be growing increasingly aware of and receptive to the company.

With record revenues exceeding $6M for 2007, MMIO appears to have broken a number of critical barriers to success for many HVAC industry hopefuls. A few of the key barriers that I have come across in my journeys include:

Time in the industry: Management contends and a number of sources confirm to some extent that many HVAC contractors fail within the first 3 years of operations. Stats that I’ve come across note that 17% of SIC 1711 companies fail within 1 year. By that benchmark, the company has progressed to a critical point.

Here is an interesting, yet not the best cited, article on HVAC industry failure rates:

Experience: According Frost and Sullivan “utilities, refineries, and industrial end users continue to prefer companies, which have had substantial experience in the NOx control equipment markets”. With proven capabilities in this regard, MMIO benefits greatly from its position as an experienced provider.

Sheer Size: According to the article above: Economic Census data reveals that in 2001, the overall industry closure rate among payroll contractors was 10%. However, contractors with one to four employees experienced a closure rate of 14% and half of payroll employers had one to four employees. Just over 25% of all payroll employers had more than 10 employees, putting MMIO in the same class of the Powell’s of the world.

A growing customer base that includes a number of Fortune 500 companies and big names such as ConocoPhillips and Lucite. If the company’s products are good enough for this echelon of clientele, they should be good enough for any petrochemical company worldwide.

Flexibility and ability to quickly respond to market demand with new and innovative products: The Company’s new Stallion product line was developed for instances in which industrial real estate is limited. In addition, the company’s custom fabrication capabilities allow it to execute product runs of all sizes. Many of their bigger competitors set minimum limits on custom jobs, which to my knowledge bring in a higher profit margin for MMIO in comparison to many other offerings.

Improved operating efficiencies: The new facility being built now is expected to help cut costs on some offerings by as much as 20-30% from what I’ve heard. The recent 10K reveals that Net loss for the 2007 fiscal year was ($3,174,967) for an improvement of 54.4% or $3,780,398 from ($6,955,365) in 2006. So, clearly, the company is becoming much more efficient.