Fitch Ratings has affirmed
The Rating Outlook is Stable.
Key Rating Drivers
Low Financial Leverage: Hubbell's financial leverage has gradually declined since its 2018 acquisition of
Secular Growth Tailwinds: Hubbell is well-positioned to benefit from several megatrends such as grid modernization and electrification, which will underpin strong revenues and earnings growth in the coming years. The company expects its underlying markets to grow at 1.5-2.0x GDP, and sees room for margin expansion driven by efficiency gains and an improving product mix. This could drive mid-to-high single digit revenue growth in the next few years, and allow EBITDA margins to approach 20%, from 17.8% in 2022.
Balanced End Markets: Fitch sees Hubbell's two business segments as complementary to each other, as they are exposed to different end markets and helps to smooth out earnings volatility. Hubbell Electrical Solutions (HES) is mainly exposed to residential, industrial, and non-residential construction, which tend to be more sensitive to consumer sentiment and near-term economic conditions. HUS, on the other hand, mainly services utilities, and enjoy relatively stable demand driven by utilities' capex cycles. HUS and HES accounted for 58% and 42% of 2022 revenues, respectively.
Steady FCF, M&A strategy: Fitch expects Hubbell to generate steady FCF after dividends of more than
Rating Constraints: Hubbell's ratings are constrained by its moderate exposure to cyclical end markets and smaller business scale relative to higher-rated peers. This is mitigated by its strong market position in underlying markets and complementary nature of its two main business segments, which help to smooth out volatility in earnings.
Derivation Summary
Hubbell's credit profile can be compared against other specialty manufacturers of similar operating scale, such as
Hubbell is rated one notch below Rockwell and Snap-on. Compared to Rockwell, Hubbell is slightly lower financial leverage, but Rockwell's business has higher technology content and enjoys better margins. Snap-on, on the other hand, has very low financial leverage (adjusted for financial services operations) and a stronger market position. Hubbell has similar end market exposure as
Key Assumptions
Revenues: 5% organic revenue growth in the utilities solutions segment and 3% organic revenue growth in the electrical segment;
Margins: We forecast a gradual increase in EBITDA margins from 17.8% in 2022 to >19% by 2026, on the back of efficiency gains and improving product mix;
M&A Assumptions: We assume that Hubbell will use excess cash of around
Capex: Maintenance capex at 2%-3% of revenues each year;
Dividends and repurchases: Common dividends to grow at ~5% per year and share repurchases remains stable at
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Demonstrated commitment to a conservative financial policy leading to EBITDA leverage sustained below 1.5x;
EBITDA margins approaching 20%, reflecting improving product mix and pricing power;
Increased earnings contribution from less cyclical business units.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A more aggressive financial policy and/or large acquisitions leading to EBITDA leverage sustained above 2.0x;
EBITDA margins decline towards the mid-teens, reflecting weakening product mix, market position, or an inability to pass through costs.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: As of
While most of the company's cash is overseas, a vast majority of its operations and cash flow generation are in the US. Hubbell's debt as of
Issuer Profile
Hubbell is a global manufacturer of electrical products and utility solutions for a broad range of customer and end-market applications.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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