This small cap stock is cheap and growing fast. It’s time to buy.

The heating system comes from a small industrial company called

nVent Electric

(symbol: NVT), and its stock is also ready to heat up. NVent is an electrical component manufacturer, and it manufactures surge and heat protection for electrical infrastructure, as well as products that bundle all the cables and wires that pass through homes and businesses. While its stock, at Friday’s close of $34.72, is down 8.6% this year, the company is benefiting from growth in automation, data centers and sensors for monitoring systems. complexes – anything electrified.

“They have leverage on all the themes/mega-trends that should be relatively long-lasting growth drivers, like the electrification of everything,” says RBC Capital Markets analyst Deane Dray.

NVent has only been a publicly traded company since 2018 when it was established

Pentair

(PNR), a move that was catalysed, in part, by activist investor Nelson Peltz’s Trian Fund Management. Investors were likely hoping that other deals were in the works — perhaps even selling nVent to another company — but those hopes were dashed when the Trian representative left the board in 2020.

Instead of financial engineering, nVent introduced new products in areas where the company is strong, such as thermal and electrical protection and electrical enclosures. It has also expanded globally, with non-US and Canadian sales reaching approximately $900 million, or 37% of total sales, in 2021, up from $760 million or 34% in 2018.

“We’ve had a strategy since we became a new company, and I always like to say [that] our strategy has worked,” CEO Beth Wozniak said at an investor conference in February.

The balance sheet can support this strategy. In an emailed statement from the company, Chief Financial Officer Sara Zawoyski said, “We left 2021 with net debt to adjusted EBITDA. [earnings before interest, taxes, depreciation, and amortization] ratio of 2 times, at the lower end of our target range of 2 to 2.5. Our strong balance sheet and cash generation position us well to invest in growth and continue to execute our M&A strategy to generate attractive returns for shareholders.

At the start of the year, investors worried that supply chain issues would hamper growth. But nVent is expected to generate nearly $2.7 billion in sales in 2022, about 9% more than in 2021, with earnings per share expected to increase 11%. The numbers are expected to rise another 5% and 10%, respectively, in 2023. This compares to annual gains of 4% and 3% for sales and EPS from 2018 to 2021.

“Can you believe we used to care about growth?” asked Wolfe Research analyst Nigel Coe in February after the company released its fourth-quarter numbers.

Nonetheless, nVent, with a market cap of $5.7 billion, is trading around 16 times estimated 2022 earnings, a discount to the

S&P500
20 times and the 18 of industrials of similar size in small caps

Russell 2000
index.

It’s also cheap for a company of the quality of nVent Electric. Its adjusted operating profit margin, at 15%, is about four percentage points higher than that of other industrial small and mid caps. Coe argues that the company could ultimately hit 20 times its 2022 EPS estimate of $2.20, or $44 per share. But even if the multiple doesn’t increase, the stock should still be worth at least $38 a year.

NVent also has a wildcard – the possibility of it being taken over. Investors who hoped more corporate actions would generate value were disappointed when Trian left, but some major electrical equipment suppliers may seek to round out their product lines as electrification trends pick up. are accelerating. NVent would fit well with some large power companies, including

eaton

(AND N),

ABB

(ABB),

Schneider-Electric

(SU.France), and

Hubbell

(HUBB), says RBC’s Dray.

This is just one more reason why nVent shares could electrify investor returns in years to come.

Write to Al Root at [email protected]