I love spending my days researching industries that the average Joe Investor doesn't even think about, let alone get excited about. Who sold the PVC piping in your house? What about the parts and supplies needed to run an apartment complex? The answer might be Hughes Supply (NYSE:HUG), a broadly diversified wholesaler of all sorts of construction and maintenance products.
Third-quarter results looked pretty solid. Total sales rose 28%, and organic sales growth was pegged at about 17%. The company estimated that higher pricing contributed 3% to organic growth, which suggests some fairly solid volume trends in the quarter.
While gross margins eased off a bit, the operating margin improved very slightly, and the company booked 32% growth in operating income. Cash flow performance was also solid on both a quarterly and year-to-date basis.
Sales growth was positive across the board, especially in the water/sewer, MRO, industrial PVF, and building materials segments. Although the plumbing segment didn't hurt the overall numbers as badly as it did in the second quarter, its results this time around looked more "stable" than "good."
One might wonder, though, how long this company plans to stick around. Not only has the board given the company the go-ahead to "consider strategic alternatives," but it's also changed some employment agreements recently. According to the 8-K, 18 individuals at senior VP level or higher were tied into non-competes and offered cash payouts upon a change in control of the company. Remember, Home Depot (NYSE:HD) has already made a purchase in this market and tacitly discussed an expansion of its industrial and construction supply business.
Even with the possibility of a buyout out there, I'm not sure that this company needs to sell out to be successful for investors. While the next quarter looks a bit challenging, the company recently reached an MRO supply agreement with Equity Residential (NYSE:EQR), and it could pursue similar deals in the future.
In the meantime, moderating prices could be a bit of a challenge to the company, but the current valuation doesn't seem to have exceptional expectations baked into the stock price. With respectable organic growth, improvements in commercial construction markets, a reasonable valuation, and larger players seemingly on the prowl, this could yet prove to be an interesting stock.
We've supplied further Foolishness:
Home Depot is a Motley Fool Inside Value recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
