Lost in all the hoop-dee-doo about the residential construction market is that nonresidential construction has begun to pick up as well. I've already spent some time talking about construction/engineering firms that make big, honkin' buildings -- firms like Chicago Bridge & Iron (NYSE:CBI) and Perini (NYSE:PCR) -- but now it's time to cast the net a little wider.
With construction activity in commercial and office buildings picking up, diversified construction supplier Hughes Supply (NYSE:HUG) is showing some strong performance of late.
Results for the fourth quarter were strong. "Organic" growth was up 16% for the quarter, and EPS grew 55% despite a nearly 39% rise in shares outstanding. Although free cash flow declined a bit from last year, structural free cash flow (earnings plus depreciation minus capital expenditures) nearly doubled.
The discrepancy between the two numbers is almost entirely the result of increases in working capital that have come primarily from the company's acquisitions. Given that metrics like inventory turns and days sales outstanding remain solid, the increases in these balance-sheet items should not be considered problematic.
Hughes offers a wide range of essential products to builders -- you can't use a building that doesn't have things like water/sewer lines, HVAC, or electrical services -- and it does so as a "one-stop shop." The field has many competitors, including publicly traded companies like Wesco (NYSE:WCC), Noland (NASDAQ:NOLD), and Watsco (NYSE:WSO), but the industry as a whole is still extremely fragmented and ripe for further consolidation.
Though commercial construction is the company's bread-and-butter, there are additional growth opportunities as well. As the company attempts to expand into government work, it has considerable potential to participate in infrastructure improvement projects (like in water/sewer and electrical).
Company guidance is cautious, with management expecting high single-digit organic revenue growth, but valuation is reasonable. Investors should be a bit concerned about the company's aggressive acquisition history (and the resulting share dilution that it has produced), but management has nevertheless produced a double-digit return on equity and good cash flow.
With a reasonable dividend, brightening prospects for the nonresidential construction business, and expectations of continuing double-digit income growth, Hughes looks like it might be worth a further look.
Want to build a portfolio of those who build? Read these articles first:
- CB&I Builds the Energy Infrastructure
- Perini Tough Under Pressure
- Solid Sales for Florida Rock
- Cemex Cementing Its Lead
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.
