HUBB - Hubbell: Things Are Shaping Up For The Better

2023-05-18 11:59:46 ET

Summary

• The continued strength in orders and backlog is a positive indicator of future performance, instilling confidence in the growth potential of the Utility segment for FY23.
• While the Utility segment thrived, the Electrical segment faced challenges, experiencing a decline in volume and organic sales by 2.5%.
• HUBB has raised its guidance, anticipating revenue growth of 7-9% and an EPS range of $13-$13.50. The increased forecast reflects management's confidence, supported by solid order books and demand indicators.

Overview

I hope readers that have followed my posts so far have heeded my latest recommendation to close any short positions. The idea was that given Hubbell ( HUBB ) increased its profit outlook, and closed the valuation gap vs the S&P 500, it was no longer worth shorting. More importantly, the 4Q22 results and outlook continued to support the view of a stronger than historical growth profile. A part of my worries came true – HUBB Utility segment printed very strong results – so strong that it caused a major beat against consensus estimates by a huge mile. The result is a huge jump in share price to $275. With the continuous strong performance momentum and the new guidance, I am starting to lean towards going long the stock. However, I think it is better to wait for another quarter to see how the Electrical segment performs, and also if the Utility segment momentum can continue.

Utility Outperformance

Sales for the first quarter were up slightly over forecasts, but the actual results were more mixed. The Utility business unit performed exceptionally well, growing organically by 19% thanks to a healthy combination of increased prices and sales volumes. Notably, volume growth here was primarily attributable to T&D components, which increased by 25%. This improvement was not the result of sheer luck. I attribute this success to management's foresight in making early CAPEX investments to guarantee growth and control of service levels. Despite the fact that C&C sales were lower than T&D's, I don't think anyone was surprised by the lack of growth. These markets are relatively immune to economic downturns and should grow by the low- to mid-single digits. In fact, I think HUBB will be able to reaccelerate growth once the supply chain for chip ease further. In fact, I believe the continued strength of orders and backlog (management estimated two to three-quarters of backlog) is a strong indicator of future performance. This is equivalent to management saying that they have complete transparency into FY23 financials since they have more than 9 months of visibility already. Therefore, I have high confidence in the growth of the Utility segment for FY23. Long-term, I believe that grid modernization and electrification are providing a strong secular tailwind for HUBB, which will continue to fuel sustainable MSD growth for the foreseeable future. However, the increased backlog is not structural, and I expect it to decrease to normal levels as the supply chain normalizes and lead times decrease.

To monitor: The Electrical segment

The Electrical segment fared worse than the Utility segment, with organic sales falling 2.5% due to a decline in volume (high single digits) that was only partially offset by an increase in pricing. The residential sector's decline contributed heavily to the volume decline, but growth in the industrial sector, especially in the renewable energy, data center, and telecommunications sectors, helped to mitigate the overall decline. However, I think it's important to point out that sequential performance isn't as bad, which is a good sign for where demand levels are given that the first quarter is typically weaker than the fourth quarter due to seasonality. Given Electrical's greater cyclicality in comparison to Utility, I continue to be more cautious on it, while macro uncertainty is still elevated, especially in 2H23.

Raised guidance

My prior post emphasized HUBB's enduring capacity to propel a stronger-than-anticipated near-term growth profile, and this trend has continued. HUBB has updated their forecast to include revenue growth of 7-9% (representing an increase of 300bps at the midpoint) and EPS of $13-$13.50. It is anticipated that price and volume will each contribute 50% to the 7-9% organic growth outlook, with the volume outlook leaning more heavily toward the Utility segment. Management's ability to raise guidance reflects the strength of their outlook for FY23, which is bolstered by solid order books and demand indicators (Electric segmented). I think HUBB has a compelling story right now, and if they can deliver on their promises, the stock will continue to rise in the near future. However, I wouldn't get too carried away with my optimism just yet; I'd rather wait for 2Q results before deciding whether or not to go long.

Conclusion

The recent performance and outlook of HUBB indicate a shift in my view to potentially going long. The strong results and growth in the Utility segment, driven by strategic investments and increased sales volumes, have surpassed expectations. However, it is important to note that the backlog and order indicators are not structural and are expected to normalize as supply chain challenges ease. On the other hand, the Electrical segment faced challenges with declining volume, particularly in the residential sector. I believe HUBB's updated guidance, with increased revenue growth and EPS expectations, reflects management's confidence in the company's performance and demand indicators. However, I would recommend to wait for the second-quarter results before making any investment decisions.

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