nVent Looking Undervalued Despite Some Near-Term Margin Leverage Challenges

 

I called nVent (NVT) a “borderline buy” call in my last write-up on this manufacturer of electrical and thermal products, and the share price performance has been pretty consistent with that view – the performance since then hasn’t been great in absolute terms (up about 3%), but the shares outperformed the broader industrial sector and comps like Eaton (ETN) and Hubbell (HUBB). Along the way, the company has delivered some exceptional organic growth on strong pricing, though the incremental margins haven’t been so impressive.

I have to admit, my view on nVent is still along the lines of “yeah, they’re okay, I guess,” and that’s not the most helpful guidance to readers. I do like nVent’s leverage to improving industrial activity (including industrial construction) and electrification, as well as improving offshore and midstream energy activity. I also see some balance sheet flexibility to do deals, and my valuation models say these shares offer above-average potential, so I’m grudgingly more positive on these shares.

 

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nVent Looking Undervalued Despite Some Near-Term Margin Leverage Challenges

nVent Leveraging Improving Demand And Driving Better Margins

 

The last six months have largely gone the way I expected for nVent (NYSE:NVT) since my last article. The company has indeed leveraged improving electrification demand across its industrial, commercial, and infrastructure markets, as well as seen a faster-than-expected turnaround in the thermal business. Incremental margin leverage has been more or less on par with other industrials, and management has gotten more active putting capital to work in M&A.

I still don’t believe that nVent is a superior play on the electrification “super-trend” I expect over the next decade, nor the best play on grid modernization/hardening or data center growth, but a company doesn’t have to be superior to outperform, as the Street is driven so much by expectations. I continue to believe that there’s a “it’s better than you think” angle to nVent’s story that’s still relevant, and while I think return expectations are now more ordinary, “ordinary” is the new undervalued in this market, so it may still be worth some consideration.

 

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nVent Leveraging Improving Demand And Driving Better Margins

nVent Prioritizing Better Opportunities As Electrification Demand Is About To Accelerate

 

As recovery plays go, I can't complain too much about the performance of nVent (NVT) since my last update. I liked the company for its leverage to a short-cycle industrial recovery in 2021, and that thesis is still very much in play. On top of that, though nVent isn't the best way to play widespread electrification, it does still have leverage there and I see additional self-improvement potential.

These shares are up more than 40% since my last update, handily outperforming not only the S&P 500 and the broader industrial space, but other electrification names like ABB (ABB), Eaton (ETN), and Schneider (OTCPK:SBGSY) as well, and almost performing industrial growth story Itron (ITRI) as well.

Although I do worry that nVent's less impressive growth and margin profile will factor more into future performance, I do still the shares as undervalued enough to be worth consideration.

 

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nVent Prioritizing Better Opportunities As Electrification Demand Is About To Accelerate

nVent Seems To Be Underperforming Its Markets, And It's Not Clear Why

Given the valuation, end-market exposures, and performance relative to its end-markets, I wasn't too keen on nVent (NYSE:NVT) back in May of this year. Between weakening industrial end-markets (which I expected), further relative underperformance (which I feared), and the surprising departure of the CFO, as well as management reiterated that it doesn't plan on a large-scale change in its R&D process, the shares are down about 10% from the time of that last article and were down closer to 30% before a decent third quarter and an overall industrial rally lifted the stock.

Relative to industrials broadly, and other electrical-exposed peers like ABB (ABB), Eaton (ETN), Emerson (EMR), Hubbell (HUBB), Legrand (OTCPK:LGRDY), and Schneider (OTCPK:SBGSY), nVent's share price performance has been pretty poor. On a positive note, the company's margins still remain quite healthy, and I expect many short-cycle industrial markets to start showing demand recoveries around the middle of next year. I don't really consider the valuation a "can't miss" now, though I would note that once May 2020 rolls around, nVent could be more in play as an acquisition target.

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nVent Seems To Be Underperforming Its Markets, And It's Not Clear Why

Lackluster Growth And Valuation At nVent, But Balance Sheet Flexibility Remains

In a mixed quarter for industrials, nVent's (NVT) mixed quarter seems like par for the course to me. By no means was it a disaster, and the price-driven margin uplift was encouraging, but there's not much reason to expect robust growth in the near term, and after a moderately sector-beating performance since my last update, the valuation is more in the range of "okay, I guess…" now. I don't recommend selling core positions on the basis of quarter-to-quarter vibrations, but with some concerning signs regarding end-market growth across the industrial sector and relatively elevated valuations, I'd wait for a better entry point for new money.

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Lackluster Growth And Valuation At nVent, But Balance Sheet Flexibility Remains

nVent Hitting Its Growth Goals, And Margins Should Eventually Catch Up

At the time of its separation from Pentair (PNR), nVent Electric plc (NVT) had two key goals - accelerate its historically poor organic growth rate and drive margin leverage. This is still a very new story as an independent public entity, but so far so good - nVent has indeed being outgrowing its end-markets (and peers like Eaton (ETN)), and while the margin leverage isn’t there yet, there’s still a longer-term case for that.

I wasn’t all that impressed with the company’s valuation back in September and the shares have fallen about 6% since then, more or less keeping pace with industrials as a group and outperforming some of its peers like Eaton, Hubbell (HUBB), Schneider Electric (OTCPK:SBGSY), and Thermon Group (THR). The valuation is more interesting now, though, and although nVent doesn’t really look poised for huge short-term outperformance, it’s not a bad small/mid-cap industrial name to consider now.

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nVent Hitting Its Growth Goals, And Margins Should Eventually Catch Up

nVent Needs To Use Its Independence To Drive Growth

As the former Technical Products business of Pentair (PNR), nVent (NVT) has some important positive characteristics, including well-regarded brands, strong share in certain segments of the enclosure, heat tracing, and electrical fastening markets, and strong margins. What it has historically lacked, though, is growth, and that needs to be one of management’s foremost priorities if nVent is going to be a significant success as an independent company.

Although I do expect better growth relative to nVent’s track record, I don’t see enough growth to drive a compelling valuation today. To me, the shares look more or less like many industrials – not really attractively priced unless you have a pretty bullish outlook on the U.S. cycle and the company’s ability to pass on higher costs.

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nVent Needs To Use Its Independence To Drive Growth