It might seem a stretch to describe a stock that's risen 35% in the last year as "underfollowed," but that's how I see nVent Electric (NVT -1.38%). The company recently reported an excellent set of fourth-quarter earnings and has strong growth prospects in 2022 and beyond. Moreover, it trades at a compelling valuation, making it the best value stock in the electrical sector. Here's why it's worth buying today.
nVent Electric
For those who don't know the company, nVent is a play on connection and protection in the electrical sector. As such, it's a beneficiary of the trend toward electrification in the economy.
Image source: Getty Images.
Key end markets include the industrial sector (43% of sales), where investment in automation and digital solutions are driving growth. Construction (28%) is another important market, and the bounce in nonresidential construction in 2022 will help, as will the long-term trend toward electrification and smart buildings. Across infrastructure (21%), nVent is seeing strong growth from spending related to data centers, 5G, renewable energy, and electric vehicles (EVs). Lastly, the bounce in energy prices and increasing use of digital technology in energy will help nVent.
For reference, nVent sells electrical enclosure boxes, electrical and fastening solutions, and thermal management products. Its solutions are a crucial part of a company's safety needs and meeting regulatory requirements. Put simply, it's a pick-and-shovel play on electrification in the economy.
Three reasons to buy nVent
I'll cut to the chase:
- The recent fourth-quarter results demonstrated the strong growth trends in its end markets, which are likely to continue in 2022.
- Unlike many companies reporting this earnings season, nVent management more than offset cost inflation with price increases, while not having any significant issues dealing with stronger-than-expected volume demand.
- nVent's valuation is very attractive on an absolute and relative basis.
End-market growth
At the time of nVent's third-quarter earnings report, management forecast that organic sales growth would be in the 9% to 12% range in the fourth quarter, but it came in with a whopping 24% improvement.
All three segments reported strong growth, and management expects all its industrial verticals to grow in 2022. If it isn't 5G and data center spending, it's an investment in renewables and EVs. Meanwhile, industrial companies have accelerated investment in automation, as evidenced by Rockwell Automation's earnings and outlook. In addition, spending on smart buildings and automation in buildings is set for long-term growth, according to Johnson Controls. Finally, there are real signs that energy companies are starting to spend again, given high energy prices and a lack of investment in previous years.
| nVent Segment |
Fourth- Quarter Sales |
Year-Over-Year Organic Growth |
|---|---|---|
|
Enclosures |
$332 million |
35% |
|
Electrical & fastening solutions |
$171 million |
17% |
|
Thermal management |
$166 million |
16% |
Data source: nVent presentations.
Managing inflationary and supply chain pressures
Given the highly inflationary environment and the ongoing supply chain issues dogging the economy, investors have a crucial question: whether a company can fully offset cost increases with price increases. In this case, it's a yes. For example, on the earnings call, chief financial officer Sara Zawoyski said cost inflation (raw materials, wages, freight, and logistics) was $58 million in the quarter, but price increases added $62 million.
On a related note, the supply chain issues have created cost pressure and a lack of product availability that have restricted some companies' ability to meet volume demand. But again, that wasn't the case with nVent in the fourth quarter, where volume increased by 12%. Moreover, CEO Beth Wozniak said the company had been investing in capacity, and "we would expect that we're going to have some nice volume growth" in 2022.
A stock to buy
Turning to valuation, nVent's metrics stand at a discount to Hubbell (HUBB 0.34%) and Eaton (ETN -0.40%), two other stocks focused on electrification.
NVT price to free cash flow. Data by YCharts.
In addition, management's full-year guidance calls for organic sales growth of 6% to 9% with adjusted earnings per share of $2.10 to $2.20. Another year of converting adjusted net income into free cash flow (FCF) at a 100% rate would mean around $360 million in FCF, putting nVent on a forward price-to-FCF multiple of less than 16 times FCF. That's an excellent valuation, and the current dip is creating a good buying opportunity.
