Hedge Funds’ Interest in Hubbell Inc. (HUBA): Activism, Fundamentals or Both?

Among the largest shareholders of Hubbell Inc. (NYSE:HUBA), which disclosed stakes as at the end of last year, are Anand Parekh’s Alyeska Investment Group, Jim Simons’ Renaissance Technologies and Ken Griffin’s Citadel Investment Group. Other shareholders of the industrials company include Chuck Royce’s Royce & Associates, Kenneth Mario Garschina’s Mason Capital Management and Phil Gross and Robert Atchinson’s Adage Capital Management.

Chuck Royce

Hubbell Inc. (NYSE:HUBA) is a $7.2 billion market cap company that sells electrical components and connectors for a broad range of non-residential and residential construction, industrial and utility applications. The company has two classes of common stock: Class A shares, which have 20 votes per share and account for 73% of total voting power, but only 11% of total equity value, and Class B shares, which have one vote per share. Although both classes of shares are publicly traded, the Class B shares are more liquid, as 49% of the Class A shares are held by two trusts set up by the company’s founding family, the Louie E. Roche Trust and the Harvey Hubbell Trust. The stock has been a good performer, appreciating by 24% over the past 12 months, driven by strong earnings and improving macro sentiment as well as the emergence of an activist investor. In December 2013, Ancora Advisors LLC, a traditional asset management firm that also engages in some shareholder activism, disclosed a 2% stake in Hubbell and sent a letter to its board recommending collapsing the company’s dual class equity capital structure, which it believes has been anchoring the stock price.

Financially, Hubbell Inc. (NYSE:HUBA)’s performance has been decent, as moderate revenue growth (aided by acquisitions) and margin expansion (due to favorable material costs and productivity improvements) have led to earnings growth in the high single-digit range over the past year, in-line with its peer group of electrical components and equipment companies. Hubbell’s margin and return metrics are superior to peers, which could explain its premium forward P/E multiple of 20.9X versus a peer group median of 17.2X. On a forward EV/EBTIDA basis, the stock’s valuation of 11.3X is in-line with peers.

Looking forward to 2014, management forecasts overall growth of 2-3% for the end markets, it serves, as weakness in utilities is offset by strength in residential / non-residential construction and industrials. Given this backdrop, the company expects top-line growth of 5-6% and margin expansion of 20-30 basis points this year, including the impact of acquisitions. Consensus estimates seem to reflect these projections.

In short, Hubbell Inc. (NYSE:HUBA) is a well-managed industrial company whose stock is trading at reasonable valuations. Ancora’s activism appears to be addressing a modest issue that, if resolved favorably, would improve liquidity for both classes of common stock and boost the stock prices moderately. However, this action should not have any impact on Hubbell’s fundamentals, which are already sound and do not require any intervention from outside investors.

Disclosure: none

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