NVT - nVent Electric: Momentum To Continue Following What Could Be Strong Q3 Report

2023-10-25 06:01:54 ET

Summary

• nVent Electric's share price has been steadily increasing and is expected to continue after a strong Q3 report.
• The company operates in three segments: Enclosures, Electrical and fastening Solutions, and Thermal Management.
• nVent is well-positioned in the expanding markets of factory automation, digitalization, and electrification, with potential for high single-digit revenue growth.

Investment Rundown

Over the last few months or most of 2023, the share price has quite quickly appreciated for nVent Electric ( NVT ) and I think there is good reason to believe it will continue after what can be a strong Q3 report by the company. We are less than a week out from it and I think the recent market selloff has opened up a string of buying opportunities for NVT that could yield strong short-term investment returns. Last quarter had 10% YoY sales growth, something I can see being beaten in the next report and translating into a tailwind for the company as well.

Company Segments

NVT is a global company specializing in the design, manufacturing, installation, and servicing of electrical connection and protection products. Their operations are structured into three key segments: Enclosures, Electrical and fastening Solutions, and Thermal Management. The Enclosures segment focuses on delivering cutting-edge solutions for the secure and efficient connection and protection of vital electronics, communication systems, control mechanisms, and power equipment. Additionally, they offer physical infrastructure solutions designed to host, connect, and safeguard server and network equipment.

Their diverse product portfolio features metallic and non-metallic enclosures, fastening solutions, and cutting-edge thermal management systems, which are marketed under renowned brands such as CADDY, ERICO, HOFFMAN, RAYCHEM, SCHROFF, and TRACER. This extensive range of offerings has significantly expanded NVT's ability to cater to a broad spectrum of markets, resulting in a more stable and consistent revenue growth trajectory over the years. Looking at the last 5 years for example the company has had a CAGR revenue of over 6.97% which I think speaks to the type of business and partnerships that NVT has set up so far.

Markets They Are In

The trajectory of factory automation and digitalization points towards continuous expansion. Emerging technologies like industrial IoT and digital twinning are still in their nascent stages, offering substantial growth potential . Additionally, the development of local microgrids presents new opportunities. As businesses progressively embark on the journey of automation and digital transformation, there will be a heightened demand for a wide range of NVT products. This includes enclosures, cooling systems, connectors, cable management solutions, and surge protection. While these offerings might not be as attention-grabbing as cutting-edge robots, they remain integral to the efficient functioning of automated manufacturing facilities. They serve as the unsung heroes that ensure everything runs smoothly, making them indispensable in the world of modern industry.

Amidst substantial merger and acquisition activities, including the noteworthy $1.1 billion ECM deal, as well as noteworthy developments in end markets, coupled with strategic product and market development initiatives led by the management, my optimism regarding nVent's long-term growth prospects is steadfast. I anticipate that NVT will achieve high single-digit revenue growth over the next 3-5 years. In the longer term, this growth rate might taper to 5%, which is still approximately double the underlying growth rate in the broader industrial sector. This outlook is fundamentally grounded in the continuous expansion and advancement of electrification, and NVT adeptness in harnessing the opportunities within this evolving landscape.

Earnings Highlights

As mentioned earlier on, we are not that far off from the next earnings report by the company, on October 27 NVT will be releasing their results and hesitates to suggest around $880 million in revenues and EPS of $0.73. In the last few quarters, NVT has been beating EPS quite well and I think it's reasonable to assume that EPS may come in closer to $0.77 instead as the demand is accelerating it seems and NVT had an impressive margin expansion last quarter.

Recapping the last quarter somewhat though we saw strong sales growth of over 10% and organically by 4%. What had me the most impressed though was the EPS growth of 35% YoY, a result of strong margin expansion even as interest rates have increased at a rapid pace. Interest expenses have grown to $46 million in the last 12 months, up from $31 million in 2022. What has contributed to stronger margins though has been the retention of the cost of revenues even as the revenues grew, showcasing that NVT can raise prices without losing demand.

For 2023 the estimates and outlooks for the company I think look quite promising in all honesty. The updated guidance the company provided last quarter has likely been a key factor for the rapidly growing share price. NVT anticipates sales growth of 13 - 15% YoY and adjusted EPS of $2.85 - $2.91 which reports a YoY growth rate of 19 - 21%. This means that it's reasonable to say NVT is a growth company and should be valued as such, meaning a higher multiple. With that in mind, should the next report impress and NVT raise guidance further for 2023 we may be heading towards s 20x earnings multiple very soon. This would translate to a price target of $56 for 2023 with the lower end of the EPS guidance in mind.

Risks

To facilitate the ECM acquisition, nVent has secured approximately $900 million in debt. While using debt to fund strategic acquisitions can be an effective catalyst for growth, it also heightens financial exposure. Increased indebtedness can restrict a company's financial flexibility, especially during economic contractions or unforeseen financial disruptions. Furthermore, the augmented expenses associated with servicing the additional debt could impact the company's profit margins, placing pressure on its overall financial performance.

The stock price has experienced a rapid ascent in recent months, driven by impressive earnings reports that have captured investors' attention. However, there is a looming risk of a substantial correction in the share price, a common occurrence in the market after a significant run-up. It's plausible that the price might retreat to a p/e ratio of approximately 14, which, from a value perspective, could present an attractive buying opportunity. Nonetheless, for investors seeking stability in their portfolio, the prospect of heightened volatility might be a concern, making it an additional element of risk to consider.

Final Words

The share price for NVT may have been appreciating quite quickly over the last 12 months but hasn't reached a level where I would consider it overvalued. The p/e for the company is roughly in line with the broader sector and with NVT anticipating strong double-digit net income growth for 2023 I would argue a higher multiple is justified here and this ultimately leads to my buy rating as I am comfortable buying the business under a p/e of 20. I have a price target of $56 and will be rating NVT stock a buy going into the next earnings report by the business.

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