PNR - nVent Q2 Earnings: Electrified Again (Rating Upgrade)

2023-07-31 15:02:54 ET

Summary

• nVent Electric plc saw a very strong second quarter, and made a solid deal recently.
• With earnings power coming in higher than expected, and leverage consequentially coming in lower, the outlook for this well-positioned business is sound.
• A 30% return for nVent Electric stock since early April seems deserved, as more might be in the works.

In April, I believed that nVent Electric plc ( NVT ) was looking very strong. This came after the company had seen a very strong 2022 while it announced an interesting and substantial deal for ECM. With the pro forma numbers looking alright, I was pleased to see a non-demanding valuation amidst a solid performance.

Little could I have imagined that shares have risen so much, so quickly, as a partial re-rating has been deserved, with more likely in the works.

The Base Case

Since nVent Electric plc was spun off from former parent company Pentair ( PNR ) back in 2018, I kept a close eye on the prospects for the pure-play electrics firm. At the time of the separation, nVent was a $2.1 billion electrics business which derived sales from connection and protection activities, mostly generated in North America and to a lesser extent in Europe.

Activities include enclosure, thermal management and electrical fastening solutions, used in markets like commercial, residential, energy and infrastructure. With shares trading at $22 at the time of the spin-off, I pegged earnings potential at $1.75 per share, while leverage ratios came in around 2 times EBITDA.

After a difficult time during the pandemic, when sales fell to $2.0 billion and earnings came in around $1.50 per share, the company only saw a modest recovery in 2021, all while the company acquired CIS Global in a $200 million deal along the way.

Fast forwarding to April of this year, the company traded at $40 per share, after nVent has seen a very strong 2022, a year in which sales rose by 18% to $2.9 billion, while organic growth came in as high as 20%. Operating earnings rose by 24% to $440 million, with margins reported around 15% of sales, as this resulted in adjusted earnings of $2.40 per share.

Moreover, net debt of $786 million was relatively modest as EBITDA comfortably came in ahead of half a billion, translating into reasonable leverage ratios while share trading at 16-17 times earnings.

For 2023, the company guided for a relatively modest 3-5% increase in sales, as adjusted earnings were seen at midpoint of $2.56 per share, thereby supporting a $7.5 billion enterprise valuation.

This latter observation was important, as nVent reached a $1.1 billion deal to acquire ECM, a provider of high-value electrical connectors, tools, test instruments and cable management. The deal was set to add $415 million in sales and $104 million in EBITDA, as multiples appeared to be quite fair.

Net debt would more than double to $1.9 billion, yet the contribution of ECM and some growth makes that EBITDA will likely approximate $700 million, for leverage ratios below 3 times, as I pegged a $0.20 per share earnings contribution following the deal.

This looked quite alright and with forward multiples coming down further, while leverage was intact, and the long term prospects were solid, I was upbeat on the prospects for nVent.

Powering Along

Little could I have imagined that shares would rise 30%, rising from $41 to $53 in the time frame of just a couple of months in time. By mid-May, nVent closed on the deal with ECM, and early in July the company announced the acquisition of TEXA Industries, to add advanced cooling technologies to its lien-up of expertise. Few details have been announced on the acquisition of the Italian company, other than that it employs 90 workers, being really an add-on to the business.

Towards the end of July, nVent announced its second quarter results for the quarter ending by the end of June, which means that ECM contributed for nearly half a quarter. This was seen as reported sales rose by 10% to $803 million, amidst organic sales growth reported at 4%. Operating earnings rose 40% to $147 million, with margins up nearly 4% points, as this was largely an organic achievement.

After previously seeing adjusted earnings at a midpoint of $2.69 per share the guidance is now hiked to $2.88 per share, a roughly twenty cents hike which is better than I thought as the deal only contributes for the better part of the year, and not the entire year. Net debt rose to $1.83 billion, already coming in below the debt levels seen at the time of the deal closing.

With quarterly EBITDA coming in at $209 million, and this number only including about half a quarter from ECM, a run rate of $900 million in EBITDA seems very reasonable, making that leverage ratios already coming at just two times.

This makes that leverage is quickly coming down, creating more and quicker room for more (bolt-on) deals as shares have rightfully been re-rated. Including the ECM accretion a 16-17 times multiple has risen to about 18-19 times earnings based on the current outlook, with more growth likely in 2024 on the back of the full contribution of ECM. This and a lower leverage ratio makes that appeal is increasing as the positioning of nVent to electrification, decarbonization and digitization drives long term demand for the business and its services.

What Now?

Having taken a long position in April, I find myself sitting on a decent 30% gain in that period of time which always makes it tempting to take some profits.

While the current interest rates makes it prohibitive to see huge multiple expansion, by the logic of interest rates, I am still appealed to nVent here and while it never hurts to take profits, I am sticking to my long position.

Solid execution, a reasonable valuation, and rosy long-term prospects make it worthwhile to hold onto nVent Electric plc shares.

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