I don't think one quarter should invalidate an otherwise worthy investment idea. So with that in mind, I'm willing to look past a disappointing second quarter at Hughes Supply (NYSE:HUG). After all, this is a business with growing markets, easing input costs, and modest valuation.
This wholesale distributor of construction and maintenance products announced in July that results would miss expectations. That said, sales were still up 17%, with organic sales growth of about 8% from the same period last year. Lower margins were a problem, though, and the company reported basically flat income for the period.
As is often the case for a company with numerous operating segments, there was good news and bad news. In the "bad" column, plumbing/HVAC organic sales were down 1% (and operating income fell 44%) as the company struggled with competitors like Ferguson. On the MRO (maintenance, repair, and operations products) front, sales were up, but a shift toward lower-margin products and the continued poor nationwide apartment occupancy rates hurt results.
While some management teams would try to excuse away this performance with Jedi mind tricks (like talking up the difficult year-ago comparisons), that's not the modus operandi here. Hughes Supply candidly stated that a significant problem in the quarter was a "lack of execution by management."
Although the disappointing second-quarter results took some wind out of this company's sails, I'm still interested in it. Commercial construction activity appears to be picking up, and I still see ample opportunity for growth in the wholesale distribution market, whether it's focused on construction, MRO, or manufacturing.
Apparently, at least one other company agrees with me. Home Depot (NYSE:HD) recently acquired National Waterworks, the No. 1 player in water and sewer infrastructure. I think Home Depot closed the deal because it sees a growing market that is poised for expansion of demand and profit-enhancing consolidation.
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Home Depot is a Motley Fool Inside Value selection.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
