Hubbell Earnings: Weak Results and Large Accretive Acquisition Offset One Another

Following narrow-moat Hubbell’s HUBB third-quarter earnings, we maintain our $322 fair value estimate. Revenue and adjusted operating income fell below our expectations during the quarter, though Hubbell fared worse at the operating income level. However, our expected value accretion from Hubbell’s Systems Control deal completely offsets the negative fair value impact from the weak quarter. Management also tightened its guide by lowering the midpoint of revenue, but raised the midpoint of earnings. That said, it had previously left itself plenty of cushion previously. Nonetheless, both the revised ranges look reasonable to us.

More importantly, despite the weaker print, we think our thesis remains intact. However, in contrast to past reports, Hubbell’s communication and controls business led its utility segment’s sales growth, growing sales 28% year on year. Usually, its transmission and distribution components lead the way. We assume this is due to a normalizing supply chain.

In fact, management flagged that chip supply constraints have finally started to ease and it’s seeing momentum in that part of the business. We believe this statement is more than mere hyperbole. Most of Hubbell’s business is short-cycled, but conversely this business builds a backlog, which gives management (and investors) far better visibility. Moreover, we understand this is a sticky business and it’s exceedingly rare for a utilities customer to cancel an order given the pain and expense of canceling. Additionally, Hubbell typically enjoys several projects that are in the request-for-quote or inquiry stage, which also helps visibility.