Could This Industry Come Out to Be the Victor of Earnings Season?

The concurrent trends of grid modernization and the "electrification of everything" are arguably still in their early innings. The results and earnings momentum of some of the leading players in the field, including General Electric (GE 1.99%), ABB (ABBN.Y -1.78%), and Siemens (SIEGY -1.01%) are excellent, and there's a host of other smaller companies to consider investing in for more pure-play exposure. Here's a look at the sector that just won earnings season. 

What the large players said

In truth, GE, ABB, and Siemens are far too large to have the needle moved on their earnings by their electrification exposure alone. However, it's still an essential part of the investment thesis behind the stocks. The chart below shows how all the stocks discussed here have trounced the market over the last year, and for reference, they've all outperformed over the last year as well. 

Data by YCharts.

Grid modernization is driven by the need to maintain and invest in critical infrastructure, particularly as smart grid and energy management solutions are increasing the productivity of that investment. The "electrification of everything" trend refers to the increasing use of electrified technologies such as the Internet of Things, smart buildings/infrastructure, electric vehicles and charging networks, data centers, or even simply connecting renewable energy to the grid. 

GE's grid solutions business sits in its renewable energy business, and it was a significant contributor to the whopping 94% increase in orders in the segment in the first quarter. Here's CEO Larry Culp on the earnings call: "Orders nearly doubled, led by Grid with strong growth across the businesses, including two large HVDC orders needed to connect new renewable sources to the Grid."

GE competes with companies like Siemens and ABB in the high voltage direct current (HVDC) market. Siemens's smart infrastructure segment contains three businesses with exposure to the theme. Look at their revenue and order growth in Q1 2023. Management went on to raise its full-year comparable revenue growth expectation to 9% to 12%, compared with a prior estimate of 8% to 11%.

Data source: Siemens presentations. 

Finally, ABB's electrification segment revenue rose 16% on a comparable basis in Q1 2023, with comparable orders up 5%, and would have grown even more were it not for ABB's exposure to a weak residential construction market. 

Whichever way you cut it, the trend in these sectors remains strong. 

The pure-play options

While the three industrial giants discussed above might not provide the most focused exposure to the theme, nVent Electric (NVT -1.46%) and Hubbell Incorporated (HUBB -1.57%) are two stocks that offer excellent exposure to that theme. nVent manufactures and sells electrical connection and protection products, critical to ensuring safety and regulatory compliance. As such, its solutions play across a broad swath of industries (data centers, buildings, infrastructure, utilities, communications, industrial automation) investing in electrification. 

Hubbell's utility solutions business provides transmission and distribution, substation, and telecommunication products and applications to electrical utilities to help connect them to the meter and interact with it. Meanwhile, its electrical solutions sell electrical equipment to building owners, and industrial customers use electricity in their facilities.

Both companies recently raised their full-year revenue and sales guidance and have good earnings momentum. 

Data source: Company presentations. 

Stocks to buy?

While the electrification and grid modernization trends are positive for GE, Siemens, and ABB and supportive of the investment thesis on the stocks, it's not a reason to buy the stocks. On the other hand, it is a reason to look favorably at buying nVent and Hubbell, and in particular, the former looks like an excellent value.