Taking Thermon's Temperature

 | May 22, 2012 | 9:30 AM EDT  | Comments
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Some stocks are described as hot, hot, hot. But few can deliver on that idea as effectively as Thermon Group Holdings (THR), the only public company in the world completely dedicated to the specialized heat-tracing industry.

Granted, this is not an industry you encounter in everyday life -- unless you are a power plant operator or a plumber. And it is far from the most interesting industry.

But in its own humble, unassuming way, Thermon has performed much better since its initial public offering than virtually every Internet or social media stock that has debuted in the past year: up 70% vs. the meager 4% gain of a much more outwardly exciting company like LinkedIn (LNKD).

Boring may not score many points at cocktail parties, but the low expectations that characterize emerging growth stocks in the industrial space win points with investors.

So what is heat tracing? Simple. It is the process of externally applying heat to pipes and tanks -- typically in a factory or power plant setting -- to lift or maintain the temperature of the fluids inside. Systems can be designed broadly to simply keep pipes from freezing or can be as intricate as maintaining a specific temperature to keep two chemical compounds from reacting with each other.

Electrical and steam are the two primary modes of heat tracing, and Thermon has a full line of products and equipment in both categories including heating cables, tubing, control devices and software.

Although the oldest incarnation of heat tracing dates back to the nineteenth century, Thermon entered the market in 1954 in Texas when company founder Richard Burdick invented a heat transfer compound. Over the years, the firm slowly expanded its product line and branched out geographically, now generating 70% of its revenues outside North America.

The Burdick family sold its controlling interests in the company in 2007, but Thermon remains in familiar hands. CEO Rodney Bingham has been with the company for four decades, taking over the top duties in 2009. He's served in executive roles in nearly every division, including R&D, engineering, sales, and marketing.

While heat tracing equipment generally represents less than 2% of the total project cost of a new power plant or chemical production facility, it is a component that's unavoidable, both in the initial construction phase and after, as long as the plant remains in operation.

Thermon serves several end markets, but the oil and gas industry is its biggest client base, responsible for 60% of total revenues, followed by power generation, chemical and commercial markets. Significant geographic and sector diversification are both positives, but when you dig deeper, its business revenue mix is what really differentiates Thermon from its peers.

Aftermarket products and services, which include maintenance, repair, upgrades and expansion of existing equipment, generate more than 60% of revenue. The recurring revenue carries margins that can be two to three times greater than sales of original equipment, and further strengthens the relationship with clients.

The heat-tracing sector is highly fragmented, but consulting firm Alvarez & Marsal estimates Thermon holds the number two market position globally at about 21%, behind only Tyco Thermal Controls, a subsidiary of Tyco International (TYC). In fact, Thermon holds either the first or second position in every country it operates in and has the advantage of having the broadest product portfolio.

The company isn't resting on its laurels, having already identified more than 500 new projects around the world with an estimated $1 billion in potential revenue over the next few years, many from existing customers that include Dow Chemical (DOW), Exxon Mobil (XOM) and 3M (MMM).

Revenue has been incredibly consistent, recording only three years of sales declines in the past 20 years, and rising 90% in the past five years. The catalyst going forward is the announced sales expansion to $500 million from $250 million, enabling Thermon to increase its geographic footprint around the globe further.

The company has been public just over a year, gaining $9.50 since its shares debuted at $12. A cool-down to around $19.50 may offer a good entry point over the summer.

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