Hubbell Lighting It Up With Pricing, But Sentiment On Electrification Plays Dimming

 

I had pretty mixed feelings on Hubbell (HUBB) back in August of 2021, as I liked the company’s leverage to electrification products, including grid modernization, but wasn’t so excited about the margins, valuation, or prospects for outperformance. Since then, the shares have lost close to 15% of their value, lagging the broader industrial sector, but not really doing substantially worse than peers/rivals like ABB (ABB), Eaton (ETN), or Schneider (OTCPK:SBGSY), though nVent (NVT) has done a fair bit better.

I like the sale of the commercial & industrial lighting business, and I think it’s a little premature to write off leverage to further short-cycle recovery, to say nothing of Hubbell’s leverage to further spending on grid modernization assisted by the infrastructure bill. On top of that, Hubbell has done better on pricing than I expected and is in relatively better shape than most with respect to operating leverage.

Valuation is still not compelling to me. The shares are a little below my long-term cash flow-based fair value, but a prospective return in the high single-digits is more “okay” than “compelling”. I would like this as industrial rally idea, but I could just as easily see these shares hitting the $150’s before rebounding as jumping back up above $190 in the near term.

 

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Hubbell Lighting It Up With Pricing, But Sentiment On Electrification Plays Dimming

Hubbell Benefiting From Strong Outlook, Electrification Demand Is Sparking Across Its Markets

 

Electrical products company Hubbell (NYSE:HUBB) has done a little better than I expected since my last article. I thought back in February that Hubbell was priced for performance in line with other industrials, and the 20% or so move since then is about five points better than the average industrial … though rivals in the electrical space like ABB (NYSE:ABB) and Eaton (NYSE:ETN) have done even better, Schneider (OTCPK:SBGSY) didn't do as well.

Hubbell’s guidance with second quarter earnings was positive on growth, and all of the electrical players are seeing strong demand in construction markets and improving demand in industrial markets. Hubbell may be doing even better in utilities, and with the passage of the infrastructure bill, more grid modernization and utility spending looks likely.

The only fly in the ointment is on the margin side, an area where Hubbell has had its challenges in the past, as cost inflation is creating some noticeable headwinds. While we’re currently in a market that is valuing growth above margins, that’s not been the case historically and I do have some concerns about an eventual re-rating. In any case, I do like Hubbell’s leverage to better demand trends across its markets, and it’s not as expensive as some names, but it’s not a stock I love.

 

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Hubbell Benefiting From Strong Outlook, Electrification Demand Is Sparking Across Its Markets

With Weaker Non-Resi Markets, Hubbell's Self-Help Story Is More Important Than Ever

There are good things about the Hubbell (HUBB) story, including the company's leverage to still-healthy utility markets and recovering industrial markets. The company generates decent cash flows, and while I don't like the lighting business nor the Aclara metering business all that much, I believe expectations have largely reset there.

What hasn't been so good is the margin story, with no real leverage there in several years. Management continues to talk a good game on cost-cutting/efficiency opportunities, but with non-resi markets looking weaker in 2021, executing on those opportunities is even more important.

I wasn't all that excited about these shares back in August of 2020, and since then they've largely tracked the larger industrial space, also underperforming more direct comps like ABB (ABB), Eaton (ETN), nVent (NVT) and Schneider (OTCPK:SBGSY). While Hubbell has been more cyclical in the past than these comps, and should have decent leverage to industrial end-market recoveries, the shares continue to look quite average in terms of return potential.

 

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With Weaker Non-Resi Markets, Hubbell's Self-Help Story Is More Important Than Ever

Grid Spending Keeps The Lights On For Hubbell

I thought Hubbell (HUBB) was appropriately priced back in December, and the shares have since basically tracked the larger industrial group, with quasi-comparables like Eaton (ETN) and Schneider (OTCPK:SBGSY) doing better and ABB (ABB) doing worse (I say quasi-comparables as these are large, diversified multi-industrials), while nVent (NVT) also performed worse.

Hubbell is an intriguing mix of good near-term opportunities and significant near-term challenges. I’m not bullish on the prospects for non-resi construction or oil/gas through 2022 (around 40% to 45% of the mix), but I am bullish on utility spending (35% of revenue) and the company’s leverage to potentially more V-shaped recoveries in short-cycle industrial and resi construction. The shares aren’t “can’t miss” cheap in my model, assuming long-term revenue and FCF growth in the low-to-mid single-digits, but they do look priced for high single-digit to low double-digit annualized returns that are better than most of what I see in the industrial sector now.

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Grid Spending Keeps The Lights On For Hubbell

Good Progress On Cost Control And Strong T&D Markets Helping Hubbell

When I last wrote about Hubbell (HUBB) in May, I saw mixed prospects for this manufacturer of electrical and power products for utility, construction, industrial, and energy customers. I did think (and write) that the shares looked undervalued and that the company’s late-cycle exposure was the right mix for what I thought would be a weaker-than-expected short-cycle economy. On the other hand, I also liked Schneider (OTCPK:SBGSY) and Eaton (ETN) better.

Since then, short-cycle end-markets have indeed weakened more than the Street expected earlier in the year and Hubbell has benefited from its strong utility exposure, as well as its internal self-help efforts on costs (manufacturing, et al). Hubbell shares are up about 18% since then, beating the broader industrial sector, while Schneider has in fact performed better (about 10% better), though Eaton’s performance has been more of a “push”.

Looking at 2020, I like Hubbell’s utility exposure even more, as I see grid spending as one of the healthier markets out there. I’m more concerned about oil/gas, but I think Hubbell’s specific exposures may be better than the overall market, and I expect more progress on costs/margins (particularly in 2021). What I’m not so fond of is the valuation. Like so many industrials, and particularly those with better late-cycle exposure, the shares have been strong enough that I don’t see a compelling valuation, though I don’t find them overpriced either.

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Good Progress On Cost Control And Strong T&D Markets Helping Hubbell

Hubbell Outperforms On Margins, But Growth Is Going To Slow

As a later-cycle play, Hubbell (HUBB) shares have done only so-so in the market since my last update, underperforming the broader industrial category, as well as other electrical product companies like Schneider (OTCPK:SBGSY) and nVent (NVT), but doing comparatively better than Eaton (ETN), Acuity (AYI), and ABB (ABB) over that time. While Hubbell does seem a little ahead of pace on margin improvement, and I believe management's outlook for market growth as 2019 rolls in is quite realistic, slowing growth in future quarters may limit some of the share price potential.

I don't prefer Hubbell to Schneider or Eaton, but the shares do seem undervalued at a time when many industrials seem richly valued. While I think Hubbell's lower growth profile and still-not-so-impressive margins may remain an issue for the share price performance, I do still see some value here at a time when that's harder to find in industrials and the market in general.

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Hubbell Outperforms On Margins, But Growth Is Going To Slow

Rexel Delivering On Its Turnaround, But Getting No Credit

In closing my last article on Rexel (OTCPK:RXEEY) (RXLSF), I commented that “turnarounds can test investor patience”, and that has certainly been true for this global electrical products distributor. The market hasn’t been too keen on many stocks in the distribution space since that last article, with stocks like Grainger (GWW) and Ferguson (OTCQX:FERGY) losing ground, but Rexel has done substantially worse, and likewise lagged the shares of electrical products companies like Eaton (ETN), Schneider (OTCPK:SBGSY), Legrand (OTCPK:LGRDY), Hubbell (HUBB).

I can understand investor concerns about slowing macro, as I too expect construction spending to slow in the EU and U.S. in 2019, and I can likewise understand concerns that Amazon’s (AMZN) efforts in the space will lead to lower margins over the long term. Still, those issues seem more than amply reflected in the share price, and I don’t think the valuation reflects the progress made in 2019, nor the benefits yet to be seen from exiting underperforming businesses and restructuring toward higher-value products.

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Rexel Delivering On Its Turnaround, But Getting No Credit

Hubbell Looking To Self-Help And A Cyclical Boost

Later-cycle plays have gotten more attention as this year has gone on, and with that electrical product and lighting specialist Hubbell (HUBB) has closed some of its multiyear performance gap relative to industrials, with the stock actually outperforming the Industrial Select Sector SPDR ETF (XLI) over the past year as well as handily outpacing Acuity (AYI) as well. Add in the Aclara acquisition, ongoing restructuring efforts, and an apparent willingness to address the lighting business more directly, and I can see why these shares have done well in recent months.

As far as valuation goes, Hubbell is more of a lukewarm prospect to me now. I like the potential of what facility consolidation, automation, and supply chain improvements could bring, but margins have been weak for a while despite an ongoing effort to restructure. Likewise, while I like the diversification that Aclara brings, lighting remains a tough market. The perception of Hubbell as a late-cycle play should aid sentiment, and the shares do have some upside on an EV/EBITDA basis, but the overall long-term return potential looks more or less in line with most other industrial names.

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Hubbell Looking To Self-Help And A Cyclical Boost

Schneider Electric Not Getting Much Credit For Share Gains

Sometimes you have to love Wall Street logic. Grow slower than your peers? Well, you’re losing share, so that’s a “hold”. Outgrowing your peers? Well, looks like you’re at peak growth. Better go with a “hold”. Tongue-in-cheek cynicism aside, I do wonder what it will take for Schneider Electric (OTCPK:SBGSY) (SU.PA) to please the market, as this company not only posted one of the better organic growth rates for the quarter, it saw some operating leverage, and also raised guidance.

I understand concerns about a short-cycle slowdown, but the results and guidance posted by industrials so far this quarter suggest less risk of an imminent downturn, and Schneider is looking to boost prices in the second half of the year. With the shares down another 5% or so from my last write-up (when I thought the valuation was borderline), this is starting to slide into my “buy” zone, though I will admit the negative sentiment is a little bit of a concern in the near term.

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Schneider Electric Not Getting Much Credit For Share Gains

Seeking Alpha: WESCO Still Waiting

WESCO (NYSE:WCC) hasn't exactly distinguished itself in the six months since I last wrote about the company. Admittedly, not many distributors have done well over that time, as HD Supply (NASDAQ:HDS), Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST) and several others are in the red, but it is nevertheless frustrating that WESCO has paired a frustratingly slow recovery in key markets with shortfalls in its reported margins.

Pushing out some of the expected improvements in financial performance does take some upside out of my price target, but with a fair value in the mid-$80s, I still believe WESCO is a worthwhile name to consider as a play on a non-residential construction recovery. Management needs to show that it can deliver real results from its "One WESCO" strategy, but I do see a path for the company to generate better margins and asset turnover as it continues to integrate acquisitions and leverage end-market recoveries.

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WESCO Still Waiting

Investopedia: Hope Seems To Outshine Reality At Acuity Brands

It has been almost two years since I last wrote on Acuity Brands (NYSE:AYI), and in that time the company has seen only the barest recovery in residential and commercial construction, the acquisition of a major competition by a large conglomerate, and the advancement of LED lighting as a more feasible alternative. It is this last item that is likely to be the biggest driver for Acuity, as a switch to more efficient LED lighting could stimulate significant sales. As often seems to be the case with Acuity shares, though, it seems like investors are already well ahead of curve on this name.

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Seeking Alpha: ABB-Thomas & Betts Deal Is A Good One

Swiss multinational industrial company ABB (ABB) has been teasing investors for a little while now. While management has done a laudable job of cutting costs, seemingly everyone has been waiting for announcements with a little more "oomph" -- specifically, deals that can goose the company's growth rate. After more than a few near-misses, ABB found a deal that should make investors happy, as Thomas & Betts (TNB) looks like the right company at the right price.

The Deal To Be
The boards of ABB and Thomas & Betts have agreed on a deal that (if approved by shareholders) will see ABB acquire the company for $3.9 billion in cash. That works out to $72 per share and a 24% premium to Friday's close. In paying over 10 times EBITDA, ABB is hardly fleecing Thomas & Betts shareholders, especially considering that this company has struggled to produce consistently good returns on capital. Nevertheless, there are some definite synergies that should reduce the effective cost to ABB, as well as the prospects of an eventual recovery in the construction markets that make up a sizable percentage of Thomas & Betts' business.

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ABB-Thomas & Betts Deal Is A Good One

Investopedia: Acuity Shines A Little Brighter

There are plenty of reasons the lighting market should be a little dim these days. Residential construction activity is almost nonexistent in many major markets, Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) are not seeing much renovation demand, and commercial real estate is scarcely better. On top of that, customers have other pressing financial obligations that take precedence over swapping out inefficient lighting fixtures, and many consumers are resisting the mandatory switch away from incandescent lights. 


So with Philips (NYSE:PHG) already forecasting a bad quarter from lighting, Siemens (NYSE:SI) backing that up and Cree (Nasdaq:CREE) struggling mightily, it would only make sense for Acuity Brands (NYSE:AYI), the No.1 lightning equipment company in North America, to be struggling as well.

Third Quarter Results Not As Bad As Feared
Given the gloomy guidance from Philips and Siemens, Acuity actually seemed to do quite well this quarter. Revenue was up 12% (up 9% on an organic basis) and nearly matched the high-end estimate on the Street. Growth was boosted by volume (up 5%), and the company seems to be succeeding in pushing through price increases. 




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Acuity Brands Still Waiting For The Turn

Non-residential construction is still in a dark place, and that has kept the prospects for Acuity Brands (NYSE:AYI) dim as well. Even still, this leading lighting company has managed to tread water through difficult times and could be relatively close to a turning point. 

The Quarter That Was
The company's fiscal fourth quarter was another tough one, but Acuity nevertheless managed to surprise and surpass the analyst expectations. Revenue rose 5%, helped by a 6% boost in volume. Although the companies' quarters do not line up evenly (Acuity has a August year-end), this result is somewhat mixed relative to rival lighting companies - Hubbell (NYSE:HUB.A) had nearly 11% growth in the last quarter, while Cooper (NYSE:CBE) had a little more than 5% growth.

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