Hubbell, Inc. engages in the design, manufacturing, and sale of electrical and electronic products for a broad range of industries. About 69% of sales are electrical products for industrial, commercial, and institutional facilities, and about 31% are products sold primarily for the electrical utility industry.
The company has guided to a 2% to 4% end market growth rate, and sustained growth through 2020. Further we anticipate the company should have, with acquisitions, an even stronger sales growth, strong free cash flow growth, and strong dividend growth per share over the next few years.
Confirmation through research
We believe the financial model confirms our thesis as the company has laid out a target of 2x end market growth in sales, thanks in part to acquisitions. From 2012 to 2017, Hubbell has made 27 acquisitions at what we think is a reasonable average valuation of 9x EBITDA. Further the company has a goal of 40% to 50% of net income to go toward dividends, which with expected net income growth would lead to growth in dividends per share. The company has grown its dividend per share since 2008 and already has an above market dividend yield at 3.3%. Hubbell made a large acquisition in Aclara, a provider of smart infrastructure to utilities, for $1.1 billion in 2018. We foresee Aclara to further help Hubbell achieve its targets. At the moment the company is selling for over a standard deviation below its 15 year average forward P/E.
We don’t think the market is assigning a fair value to the business considering the company’s end markets growth, strong acquisition history, free cash flow generation, above market dividend, and dividend per share growth. We believe the multiple should re-rate over time as the company executes on its targets over the next few years.