I'm a big fan of businesses that provide essential goods or services but generally get little more than a yawn and a shrug from Bubblevision and the financial press.
If you're engaged in the construction business, you don't have the luxury to waste a lot of time sourcing your materials, but you certainly need them. That's where Hughes Supply (NYSE:HUG) comes in -- with its widely diversified, wholesale construction, repair, and maintenance distribution model.
While the combination of soaring commodity prices and an awakening of the non-residential construction market last year set a high bar for comparisons, Hughes still came through with a good first quarter.
Reported revenue growth reached 25%, and 9% of that was classified as organic growth, slightly surpassing the company's expectations. While operating income growth followed along at about 24%, higher taxes (compared to an unusually low year-ago level) squeezed net-income growth to 14%. A high level of share dilution took a little more wind out of the sails, and earnings-per-share (EPS) growth was only 6% for the period.
By and large, there were no major changes in the nature of the company's business. Water and sewer continued to be an area of top-line strength, as were the industrial PVF and building materials businesses, and the MRO business still suffered due to the ongoing weakness in the apartment sector.
That's not to say that the company didn't take some steps forward, though. A new software system should facilitate Hughes' goal of further reducing selling, general, and administrative (SG&A) expenses, and the company continues to make efforts to penetrate the government housing market (both military and civilian residential).
Hughes Supply has two trends that I believe will continue to work in its favor. Non-residential construction seems to be picking up. In addition, the wholesale distribution market remains ripe for consolidation. While rivals like Wesco (NYSE:WCC), Wolseley (NYSE:WOS), and Noland (NASDAQ:NOLD) will continue to compete for business and acquisitions, Hughes appears to be sitting in a great position as a growing one-stop shop.
That's not to say that it's a slam dunk. Valuation looks reasonable, and the company posts a good return on capital, but share dilution worries me a bit. While both the company and analysts expect accelerating double-digit EPS growth in the future, achieving that will partly be a function of the company's future mergers and acquistitions (M&A) behavior.
I'd certainly like to see a little less dilution (and a little more EPS growth), but I also understand that you must sometimes spend money to make money. With a good business model, the potential for margin improvements, and broad national exposure, Hughes Supply could still be an interesting ride-along idea for a commercial construction recovery.
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Unknown, reasonable valuation, good business.... Could Hughes Supply someday be a Hidden Gem? Find out about today's Hidden Gems with a free trial to the Motley Fool Hidden Gems newsletter.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
