Hubbell Incorporated

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Hubbell Incorporated is a global manufacturer of quality electrical and utility solutions that serves a broad range of customers in construction and industrial markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hubbell operates through two primary segments: the Electrical Solutions segment, focused on products for electrical transmission, distribution, and generation; and the Utility Solutions segment, specializing in products and systems for utility companies and critical infrastructure.

Business Overview

Hubbell Incorporated (HUBB) is a multinational company that designs, manufactures, and sells electrical and electronic products for various nonresidential and residential construction, industrial, and utility applications. The company operates primarily through two segments:

Electrical Solutions: This segment includes products for electrical transmission, distribution, and generation. These can include wiring devices, connectors, lighting solutions, and other electrical components used across various building types and industrial operations. This segment is a larger contributor, making up 60% of the total sales.
Utility Solutions: This segment focuses on products and systems for utility companies. These products often serve critical infrastructure such as power transmission and distribution lines. The segment is responsible for ~40% of the total revenues.

Hubbell’s strategy emphasizes a balance of organic growth, through innovation and geographic expansion, and strategic acquisitions. The focus on innovative, reliable products, along with strong customer relationships, is central to their business model.

Industry Trends & Competitive Landscape

Electrical and Utilities Market Growth: The markets that HUBB operates in are driven by factors such as increasing infrastructure investments, a focus on renewable energy systems, and growing demand for automation and energy-efficient products. These factors provide a tailwind for Hubbell.
Competitive Dynamics: The industry is marked by a number of large players and a lot of competition. Competitors often have overlapping product lines, which drives price competition. There’s also a lot of focus on building close relationships with distributors and end-customers. Differentiation is key to success within the market.
Technological Adoption: There is increasing adoption of new technologies such as smart grids, advanced sensors, and automation. Companies that can successfully integrate these into existing products while controlling costs, will be able to create value and grab a bigger market share.

What Makes Hubbell Different?

Established Brand: HUBB has a long history and a well-known brand in its respective segments, which can lead to a degree of customer preference.
Broad Product Portfolio: HUBB’s broad range of electrical and utility products across many different categories is a plus. Also, its geographic diversification reduces concentration risk.
Strong customer relationships: HUBB has historically partnered with distributors who sell its products. The sales and marketing team focus on customer service.
Innovation and R&D: With a focus on research and development, HUBB aims to differentiate itself through innovative solutions, especially around improving performance and reducing costs. They also focus on using software in their hardware for better user experience.

Financial Analysis

Revenues: Hubbell’s revenues for the nine months ended September 30, 2023, were 4.03B million USD, with organic growth of 3%. The company shows strong organic growth in some segments, but some of this revenue came from acquisitions.
Profitability: For the three and nine months ending September 30, 2023, the company has produced a gross profit of 63.7% and net income margin of 16.7%. The net income was 5.78 per diluted share. Adjusted operating margin, which excludes the effects of some non-recurring items, was 18.1% of net sales for the quarter. While overall growth in sales has been decent, profits have been very volatile due to various one time charges and expenses.
Balance Sheet: HUBB has a fair amount of debt, at 1.95 billion USD, while having 5.9 billion USD in total assets. They also have a decent amount of current assets (1.7 billion USD), which shows the capacity to meet near-term obligations.
Recent Acquisition: In the third quarter of 2023, Hubbell completed the acquisition of Northern Star Lighting, an action that they hope will help to bolster sales and increase revenues in the future.
Share Buybacks and Dividends: In October 2022, the Board approved repurchases of up to $500 million USD of company stock. Additionally, HUBB pays a reasonable dividend with a current yield near 1.7%.
Cash Flows: As of the third quarter ending in September 2023, Cash from operations was positive at 669 million USD. However cash used in investing activities was 675 million USD.
Earnings: HUBB has reported diluted EPS of 3.72 for Q3, which increased from the previous year. However, net income attributable to Hubbell was only 201.1 million, less than previous years.

Moat Assessment: 3 / 5

Brand Recognition: Hubbell benefits from its strong and well-established brand, particularly in the electrical solutions segment. This offers a degree of customer loyalty and can lead to pricing power in certain product areas.
Product Breadth: The diversity of its products across many categories is a competitive advantage. By catering to both electrical and utilities needs, HUBB has access to many high-demand markets and has diversified its revenue streams.
Economies of Scale: While not a major driver, HUBB has shown some signs of economies of scale, and with the company being on the larger side, there is some inherent cost benefits in comparison to the smaller players.
Switching Costs: Although the company has a wide range of products, for many of those products, there are low switching costs, which can give competitors a chance to come and steal the customers, particularly when there is price competition.
Limited Moat Protection: While HUBB has some competitive advantages, the business doesn’t have the kind of strong moats offered by network effects, a low-cost production model, or unique intellectual property to deter competitors.
Overall: A three out of five rating reflects HUBB’s ability to maintain some competitive advantages, while not having dominant market power. It can also be improved by leveraging its brand recognition and technological abilities.

Risks to Moat & Business Resilience

Raw Material Costs: Volatility in raw material prices (like steel, copper, aluminum) can compress profit margins, particularly if HUBB cannot pass the costs to customers. This will depend on pricing power and contractual agreements.
Supply Chain Disruptions: Being a global company with operations in many different parts of the world exposes them to various risk factors and disruptions that can hurt the supply chain which can further affect the company’s earnings
Pricing Pressures: Intense competition can lead to pricing pressures, making it difficult for HUBB to fully realize the benefits of scale or innovative offerings.
Technological Changes: In a technologically-fast changing world, companies that can’t innovate and keep up are left out of the market, and so companies like HUBB must stay on the cutting-edge to stay relevant.
Economic Slowdown: Given that the company relies upon infrastructure and industrial investments, a broad economic slowdown can hurt the company’s sales and margins.

Understandability: 2 / 5

Product Complexity: While the basic products are fairly simple to understand (electricity, power transmission, etc.), HUBB operates in many different segments that have their own intricacies, like the specific types of electrical gear, making it difficult for a lay-person to understand everything.
Financial Reporting: There are also lots of “adjustments” and “non-recurring items” in financial reports that are hard for an investor to separate and adjust.
Acquisitions: A big part of the growth of HUBB is through acquisitions, which are usually not easy for an investor to analyze, as they require a detailed look into the acquired business and whether that was a good purchase or not.
Overall: The underlying businesses are somewhat easy to understand, but the sheer size of the company combined with its operations makes a complete understanding rather complicated, for an average investor.

Balance Sheet Health: 4 / 5

Good Liquidity: While the company has 1.95 billion in debt, it maintains a liquid position (current assets of 1.7 billion USD) to meet short term obligations.
Debt Management: While debt levels are high, the company has sufficient coverage ratios (shown by “interest coverage”) to pay interest expenses, while continuing operations.
Strong Cash Flows: The company has managed to generate a sizable amount of cash from operations and has good management of its operations to convert operating income into cash.
Overall: HUBB’s balance sheet seems to be fairly healthy, with manageable levels of debts and good cash flows. However, the high debt and the need for more long-term debt is a concern.

Recent Concerns and Management Commentary

Supply Chain Volatility: Management has noted issues with supply chains and has mentioned that they have been proactively managing the situation to mitigate any effects.
Inflation: The company is also facing inflationary pressures, and so have been working on implementing pricing changes and cost-cutting measures, and they expect these to offset high costs in the future.
Acquisitions: Management has been enthusiastic about recent acquisitions, noting a history of acquiring profitable businesses that they can incorporate into their own portfolio.

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