Two important questions to ask before you buy Hubbell Incorporated (NYSE:HUBB) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Hubbell is currently valued at US$6.8b. I will take you through Hubbell’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Is Hubbell generating enough cash?
Hubbell’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Hubbell to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Hubbell’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Hubbell’s yield of 5.04% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Hubbell is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is Hubbell’s yield sustainable?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Hubbell’s expected operating cash flows. In the next few years, Hubbell’s operating cash flows is expected to grow by a double-digit 20%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Hubbell’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||US$517m||US$533m||US$581m||US$623m|
|OCF Growth Year-On-Year||3.0%||9.2%||7.1%|
|OCF Growth From Current Year||12%||20%|
Hubbell is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just Hubbell compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Hubbell to get a more holistic view of the company by looking at:
- Valuation: What is HUBB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HUBB is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Hubbell’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.