Unified Electrical Solutions Will Simplify Operations And Expand Markets

Key Takeaways

• Hubbell's integrated solutions model and operational efficiencies are expected to drive revenue growth and improve operating margins.
  
• Strong order trends and strategic acquisitions are poised to support growth in utility and electrical markets, enhancing margins and earnings visibility.
  
• Challenges in telecom and utility markets, residential lighting exit, and tariff concerns could constrain Hubbell's revenue growth and pressure profit margins.

Catalysts

Designs, manufactures, and sells electrical and utility solutions in the United States and internationally.

• Hubbell's strategy to unify its Electrical Solutions segment is expected to lead to above-market growth in certain verticals, which should drive revenue increases through an integrated solutions-oriented service model, while also improving operating margins through business simplification and operational efficiencies.
  
• The company is poised to capture opportunities from secular growth trends across utility and electrical markets, particularly in transmission, substation, renewables, and data centers, which are expected to contribute to revenue growth and enhanced operating profit.
  
• Proactive management of price/cost productivity, including price realization and cost control measures, is likely to support margin expansion and increase net margins, benefiting earnings.
  
• Hubbell's strong balance sheet and capital deployment strategy, including the acquisition and integration of Systems Control, are set to bolster revenue and margins by leveraging synergies and expanding in the substation market, which offers high growth potential.
  
• The anticipated fading of temporary headwinds, such as utility customer destocking and Telcom market challenges, combined with strong order trends and backlog, suggest that Hubbell will see robust revenue growth and improved earnings visibility in 2025 and beyond.

Hubbell Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Hubbell compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Hubbell's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 13.8% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach $1.0 billion (and earnings per share of $19.16) by about April 2028, up from $776.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, up from 24.8x today. This future PE is greater than the current PE for the US Electrical industry at 22.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Hubbell Future Earnings Per Share Growth

Risks

• Hubbell experienced flat sales at $1.3 billion in the fourth quarter, falling below expectations and potentially impacting future revenue.
  
• The company faced challenges in its Telcom markets and utility customer destocking, which could result in decreased revenues and negatively affect net margins.
  
• Temporary headwinds such as weakened Telcom enclosures and utility distribution products may persist, which might limit short-term growth in operating profit.
  
• The exit from the residential lighting business, coupled with competitive pressures in grid automation, could suppress revenue growth and net earnings.
  
• Concerns about future tariff impacts on cost of goods sold, particularly from exposure to Mexican supplier tariffs, add uncertainty to profit margins and overall earnings.
  

Valuation

• The assumed bullish price target for Hubbell is $506.16, which represents two standard deviations above the consensus price target of $415.46. This valuation is based on what can be assumed as the expectations of Hubbell's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $507.0, and the most bearish reporting a price target of just $350.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $6.6 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $359.47, the bullish analyst price target of $506.16 is 29.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.