nVent Electric plc

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

nVent Electric plc is a global provider of electrical connection and protection solutions, designing, manufacturing, and marketing a wide range of products used in electrical infrastructure, industrial processes, and data centers.

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.

nVent’s business is split into two main segments, Electrical & Fastening Solutions, and Thermal Management. The Electrical & Fastening Solutions segment offers connection and protection products such as connectors, fasteners, enclosures, and cable management systems for electrical infrastructure. The Thermal Management segment provides specialized equipment and solutions for process heating, fluid and pipe protection, and temperature management across various applications.

Business Overview:

nVent operates in two main segments: Electrical & Fastening Solutions (roughly 65% of 2023 sales) and Thermal Management (roughly 35% of 2023 sales).

  • Electrical & Fastening Solutions: This segment is the larger of the two, it manufactures products that help protect and connect electrical systems like industrial and commercial enclosures, connectors, and fixings. These are all very commoditized products, so scale and distribution are very important.

  • Thermal Management: This segment manufactures products that monitor temperature, and protect pipes. Includes heat tracing and other similar technologies for temperature control purposes.

The company serves a variety of industries, including industrial, commercial, and residential construction, as well as infrastructure, energy, and data centers. The demand for its products is primarily driven by construction activity and infrastructure spending in developed and developing economies.

The company has a global footprint, with a significant presence in North America, Europe, and Asia. It sells products directly to end users as well as through distributors and wholesalers.

Industry Trends and Competitive Landscape:

  • Industry Consolidation: The electrical equipment industry is undergoing consolidation, where larger companies acquire smaller companies to achieve cost advantages and increase their market share. NVT themselves are a serial acquirer, acquiring companies such as Raychem (2022).

  • Technological Advancements: The industry is also undergoing technological change, particularly with the rise of smart technology and automation. Companies that embrace these changes should be rewarded.

  • Increased Sustainability Focus: Customers are increasingly concerned about sustainability, and they are looking for suppliers that offer sustainable products. There is a desire for green products that can be installed for use with renewable energy. Companies that provide carbon-neutral, and carbon-reducing products or solutions will be more desirable in the future.

  • Supply Chain Issues: Supply chains have been volatile in the past few years, and companies with more robust and flexible supply chains have been rewarded.

  • Pricing Pressure Competition in the electrical components industry is significant with companies fighting to reduce costs.

NVT operates in a highly fragmented industry with many competitors, but some of the key competitors the company faces are Hubbell, Eaton, Legrand, and Pentair. Although they face intense competition, their size, brand recognition, and distribution network give them an edge.

What makes nVent different is that they focus mainly on engineered products, not components. They also target industries that tend to be more stable than other companies such as construction and infrastructure. They have a strong presence in niche markets, such as data centers and industrial facilities.

Financial Overview:

Let’s analyze the company’s financial health in detail:

Profitability:

  • Net sales are growing at a good pace, with organic sales growth of 9.9% in 2022, and 6.6% in 2023.
  • Adjusted EBITDA margin is at a healthy level of 18%, which has remained largely consistent since 2021, when it was at 17.4%. This has increased to 19% for Q1 2024.

  • ROIC (return on invested capital) for 2022 was at 12.7%, 12.1% in 2023, and 12.2% in the most recent quarter (Q1 2024) indicating healthy returns to shareholders.

    • Note how ROIC is similar and not growing, which indicates the company’s underlying business is mature and the competitive landscape might be eating some of their advantage.
  • Free cash flow for 2023 was 363 million, compared to 442 million in 2022, however the free cash flow in the most recent quarter, Q1 2024, was 176.7 million.

Balance Sheet:

  • NVT’s balance sheet is relatively strong. The company has a debt-to-capitalization ratio of roughly 0.45, indicating the company uses debt cautiously. Most of that debt is long-term debt (total debt is roughly 2.7 billion at the end of Q1 2024). They have a manageable amount of current liabilities (1.1 billion), meaning they can deal with their obligations in the near term.

Valuation:

  • The company is trading at a forward P/E of 16, which is around the same value as the market average.
  • The company has a good dividend yield of 1.7%.

  • EV/EBITDA is around 10.7 for a forward outlook.

  • Overall the valuation is slightly undervalued compared to the broader market.

Recent Concerns/Controversies/Problems:

  • Impact of Inflation: Like other manufacturing firms, NVT is being exposed to inflation that increases their material, freight, and energy costs. This has affected margins negatively in some of their segments. They have been pricing through to customers, but there have been price lags which have depressed profits, a trend that they are working on overcoming.
  • China Slowdown: Their exposure to Asia makes the company vulnerable to a slowdown in that region. Particularly the Chinese market, where the recovery is taking time.

  • Supply chain disruptions: The supply chain issues that have plagued the past few years have continued to affect parts of the business, but it’s been improving.

    • Management believes these challenges are manageable and are expecting to see more improvements throughout 2024, both from supply chain bottlenecks and pricing. They are also investing in technology upgrades to alleviate this going forward.

    • Another thing mentioned by Management in their Q1 2024 call: “We are monitoring geopolitical risk and the potential impact on our business and supply chains, including in Russia, where we have exited, and in the Middle East, given the situation in Israel”.

  • On a longer term level, CEO Beth Wozniak mentioned this: “We are actively working to shape our portfolio to make it more resilient, more focused on high-growth, profitable market segments, that are aligned with secular growth trends. The work we have been doing is centered on three strategic priorities: enhancing growth, optimizing performance, and deploying capital thoughtfully.”

  • They believe the global trend towards “electrification”, which requires more advanced connectors, cables and protection will work in their favor and drive future growth.
  • They are pushing for products that help with sustainability, efficiency, and help customers improve the resilience of their systems.
  • Management has stated a focus on higher growth sectors, such as electric vehicle infrastructure, data centers and renewable energy.

Moat Analysis:

Rating: 3/5 (Narrow Moat)

  • Intangible Assets (Brand): NVT’s brands (such as CADDY, ERICO, and Schroff) are known in the industry. The brands are well-established and have been around for a long time and are often included in specification of designs, which gives them an advantage. However, there are more companies also producing high quality products, making the brand a moderate advantage.
  • Switching Costs: Companies that install NVT products have often used them for a long time, which creates a barrier for them to switch products. A new product would have to have significant value over existing products to warrant such a change.
  • Distribution Network: The global distribution network is vast, with over 2,000 global sales locations, this scale makes it more difficult for newcomers to compete. This gives a cost advantage over companies who can’t deliver as effectively and quickly.
  • Cost Advantages: NVT enjoys some cost advantages due to its global scale and focus on certain types of manufacturing and production. However, these are not insurmountable by other companies.

  • Size Advantage: They are often leaders in the niches where they focus, allowing them to create minipolies and extract a bit more profit than a company of the same size that was diversified.

  • Overall, NVT has some meaningful competitive advantages, but is not insulated from competitors. Their advantages are more likely to be durable than a low-cost or innovation moat, but these are often also not as strong as network effect or switching cost moats. It’s important to remember that this isn’t a software company where these moats would lead to huge returns on capital, rather this advantage has led to higher rates of return on capital than other manufacturing companies.

Understandability Rating: 3/5

The business is a bit more difficult to understand, and its future results are dependent on numerous assumptions that are difficult to determine (such as economic downturns, new competitors, and supply chain issues). It is not a highly complex business model, but not as straightforward as some other companies. Understanding a manufacturing business requires a bit more know-how than understanding a service or software business model.

Balance Sheet Health Rating: 4/5

The balance sheet is quite healthy, and has a manageable amount of debt. However, since there is not a lot of cash on hand and most of their assets is their inventory, we can’t make it a perfect 5.

Conclusion:

nVent is a good business with some solid competitive advantages, and management has an eye on both profitability and growth, with a good focus on expanding into higher growth areas. The business is generally well run, and the risks are easily understood as a reasonably mature company. Their long-term historical performance is a proof of their ability to generate sustainable cashflows. Although their results may fluctuate a bit depending on the industry cycle and general economic conditions, it is a good business with fairly predictable revenues and profits. Their valuations are slightly undervalued, but still need to be considered carefully before a purchase.