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About nVent
Ever since the public introduction of ChatGPT, the artificial intelligence (AI) renaissance has been in full force and while many AI investment trains have since left the station, a few companies that come to mind including Nvidia and Microsoft, with major data center players like Vertiv following suit and data center power suppliers such as Vistra and related commodity beneficiaries such as the centerpiece of my last article, uranium miner Cameco, which had all led me to, while maintaining a watchful eye on the main AI players, focus on companies that stand to gain the most in terms of the continued buildout of AI data centers, and incidentally, nVent popped up on my radar.
Headquartered in St. Louis Park, Minnesota, nVent designs and manufactures electrical connection and protection products for a few different broad categories, including energy, industrials, infrastructure, and other commercial markets. I always think examples help the most, so in making things a bit clearer, I have a few in the chamber.
The first lies in what nVent does for railroad operators (a nook of the greater overall industrial sector), particularly through the company’s ERICO brand, being an essential means of providing grounding and bonding, with grounding being a critical means of protecting rails from electrical faults and even lightning strikes, with the science behind it being that nVent’s equipment dissipates electrical surges safely into the ground, rather than damaging the rail, and bonding being the means of connecting pieces of rail together so electricity can flow smoothly and evenly between one another.
In the scope of yet another industry the firm serves, telecommunications, nVent provides basically the same sort of protectionary services for fixed and wireless communication infrastructure, offering the same sort(s) of protectionary services for companies and industries such as larger energy operators, and others.
These just happen to be some core markets for nVent.
Of course, data centers are an additional and growing category, with the world being in the very early innings of the AI data center buildout as the core rationale behind my investment thesis. With respect to data centers, the company’s products help support AI workloads, one of its main mechanisms being liquid cooling stations. The general chain of logic here is that as the AI ecosystem expands, so will the necessary computational power, which in turn generates a lot of heat, and nVent’s aforementioned cooling systems efficiently contain and manage this heat, enabling data center operators to ensure reliable, safe, and optimal performance. Air cooling actually used to be the primary mechanism, but given the continued exponential rise in AI and cloud computing, air cooling isn’t likely to cut it like liquid cooling will, and the fact of the matter is that the method of air cooling is losing popularity.
In addition to these cooling systems, nVent also designs and sells power distribution units (PDUs), which help ensure efficient power management in data centers, allowing operators visibility into power usage and consumption, and with respect to the already mentioned liquid cooling products, nVent has partnered with Nvidia to provide liquid cooling for its high-performance computing and AI applications, providing much needed efficiencies for those in the artificial intelligence space, and other less growth-oriented yet still important segments of the economy.
Sure, for the novice, all of this at once can be a bit overwhelming, but the next time someone at your next cocktail party inquires about what nVent does, you can straighten up, move your shoulders back, and say with confidence that it protects and facilitates all sorts of important electrical systems.
Upon learning more about this company through past investor presentations, one of the things that really stuck out to me was that only approximately 5% of data centers today are liquid-cooled, and being the more future-focused, non-present-fixated investor I pride myself on being, this statistic alone piqued my interest into this company, as this signals to me that there is a rather monumental opportunity set for a leader such as this one, and on the same slide, the company explained that that liquid cooling is growing three times faster than legacy (air) cooling, all positioning me to be an even more intrigued top-down investor.
Another more micro-catalyst includes the company being in the process of divesting its Thermal Management division for $1.4 billion in cash when the deal is closed (expected to close in early 2025), and when looking more into the dynamics of the decision making behind this move, management seemingly made a calculated decision to sell off the slower-growing segment and focus more of its efforts and capital in the data center arena, which is music to my ears.
This company is focusing with respect to the future and I am a fan of this concentration of capital.
In considering the present and my thoughts regarding economic liquidity in terms of the federal funds rate, the Fed keeps slowly cutting rates, yet one of the more recent personal consumption expenditures price index (or PCEPI, a common inflation measure) figures of 2.3% (as of October 2024, reported on an annualized basis), among many other recent historical measures tells anyone that inflation is still hanging around and sticky, leading me to believe that a few rate hikes are in order and around the corner in the second half of 2025 (my personal forecast), and if I’m right, this will heighten nVent’s cost of borrowing and simultaneously deflate capital expenditures in the industries it supplies, not presenting the rosiest future business combination, however, one of the things I’ve grown to learn is that there are a few companies (mostly tech companies) that can outpace rate-hike and inflationary pressures, and while I am not unequivocally sure that nVent fits this mold, I would be more surprised than not if it didn’t given the distinct and rapid growth of the data centers it supplies and, more importantly, is going to supply in the coming years and decades.
It also helps that this company’s products are really, really important, therefore, I have more reasons than one to believe that the mission critical nature of its offerings are going to offer yet another buffer against inflationary and higher federal funds rate pressures.
Something that I’ve come to realize is that while my interest was (and still is) mainly rooted in the firm as an AI data center supplier play, upon further thought and zooming out even further, there is an infrastructure element here as well, and with my previous comments surrounding incoming President Trump’s staunch focus on bettering, modernizing, and expanding American infrastructure, nVent would stand to benefit, as increased infrastructure spend would trickle down well for a company such as this one since this heightened spend would boost demand for the company’s products through data center growth, expansion in the energy industry, power grid modernization, and in other realms, yet another reason leading me to not be all that deterred by the potential for a series of rate hikes, should they occur in 2025.
At the end of the day, nVent is a company that plays an important role in assisting electrical systems, and the rest is not history, but rather the company’s core financials.
nVent’s stock financials
nVent has a stock price of $68.37, a market capitalization of $11.27 billion, a price-to-earnings (P/E) ratio of 19.99, and, to my surprise, nVent does pay out a regular annual dividend to its shareholders in the amount of $0.76, which I didn’t anticipate given that I view this company as more of a technology company that supports the industrial space, and growing technology companies usually don’t pay out regular dividends, but so long as this company can afford to continue issuing a little over three quarters per annum, I’m not complaining.
With respect to its price-to-earnings ratio, nVent’s shares seem to be trading at just about fair value in relation to the commonly held fair value benchmark of 20, the conventional case being that if a security has a P/E ratio greater than this benchmark, it is commonly deemed as being a smidge overvalued, but thankfully, in the most recent case of nVent, its shares are ever so slightly undervalued. Frankly, although for all intents and purposes one could assert that the company’s fair value is priced in, with what I’ve gathered so far regarding this company’s potential in the AI data center industry alone, I am not going to get that hung up on ticky-tacky valuation discrepancies, oddly enough not because the difference between the benchmark and nVent’s current ratio is borderline trivial, but because of the less binary yet objective facts facing myself relating to the advent of the AI revolution that is more than likely to expand in unabated fashion for quite some time.
Good investors consider the present, great investors focus on the future.
In the realm of the company’s balance sheet, nVent’s executives are in charge of best handling and utilizing $6.1 billion in terms of total assets and just barely over $3 billion in terms of total liabilities, accompanied by an interest coverage ratio of 6.4, indicating that management can sufficiently tend to its interest expenses with its earnings before interest and taxes (EBIT), and that it has solid footing in terms of liquidity. Also, in briefly speaking to the company’s liquidity in the short-term, nVent has total current assets in the amount of $1.3 billion and total current liabilities in the amount of $734 million, telling me that this company has the ability to grow alongside its AI and other industrial partners, and it’s going to take a lot of fumbling to find itself in financial hotwater in the near-term.
Pertaining to the company’s income statement, nVent’s total annual revenues stemming between 2019 and 2023 have typically found themselves steadily within the $2 billion zip code, however, did drop down to just below $2 billion in 2020, which can be most accurately attributed to COVID, and the impact it had on industrials, as facilities globally had to suddenly cease operations. Still, I would’ve imagined nVent would’ve reported much worse revenues during this tumultuous period, but I’m glad it didn’t, and ever since 2020, its revenues have been steadily rising each year, to $2.4 billion in 2021, $2.9 billion in 2022, and its most recently reported annual figure of $3.2 billion in 2023.
This rise is rooted in strong demand in its core markets due to infrastructure investments and even renewable energy initiatives, not to mention its geographical expansion, successfully tapping into international markets, and it also appears as though its efforts in streamlining its operations (an example being the aforementioned divestment) and optimizing its supply chain management have been paving a better forward path, and while the past and current seem good, my left-brain informs me that these initiatives plus the AI tailwind are paving a way for an even more promising future. Furthermore, all of this also is leading me to believe that revenues will continue inching up in the next handful of years, especially when considering President Trump’s upcoming second term, with rampant infrastructure spend and America being the biggest and the best when it comes to AI being some of his top priorities.
On the cash flow statement front, nVent’s total cash from operations (also measured between and during 2019 and 2023) have also been pretty consistent, panning out in the $300 million territory between 2019 and 2022 (it’s nice to find that, despite COVID, its total cash from operations held up nicely, by the way, rising from $336 million in 2019 to a 2020 figure of $344 million), in 2023, making a sizable jump to $528 million.
In learning more about what happened during and around this timeframe, nVent was certainly bearing the fruits of its labor in that it improved its profitability through better operational efficiency, also doing a good job at collecting some more cash through its receivables, decreasing its receivables and inventory levels (honed in more on core products and markets and shaved its product menu down a bit, which also helped with better managing its supply chain) in 2022, allowing the company to extract more cash flow with less capital tied up in these assets.
nVent’s stock fundamentals
As displayed on Schwab’s brokerage platform, nVent’s net profit margin stands at a healthy 16.18%, especially when comparing it to the net profit margins of some of the company’s most direct competition in the Electrical Components and Equipment space, with Regal Rexnord and Acuity Brands hosting listed respective net profit margins of 3.45% and 11%, which is sort of an additional plus in that it is my opinion that (given the supplemental research I did on Rexnord and Acuity) nVent has much better intermediate-to-long-term growth prospects than these prime competitors, and the company in question has an inherently better chance to do the most important thing and stay ahead given that it has the ability to out-profit both of these enterprises at a healthy pace, not to mention that neither of these companies seem to operate within as growth-oriented categories as nVent.
Should you buy nVent stock?
The present is already priced in, and the future matters the most.
While I will never assert to anybody that I can accurately predict the future to a limited degree of error, it doesn’t exactly take a rocket scientist to see that artificial intelligence is the real deal, infrastructure spend is more than likely to rise consequentially throughout President Trump’s second term, not to mention this company’s push into international markets that continue leaning into renewable energy (liquid cooling in data centers, for example), and while I still absolutely hold my not-so-optimistic thoughts relating to inflation and how it is likely to force the Fed to pivot from its current federal funds rate policy and begin raising rates to combat current inflation, with the additional inflationary pressures that will stem from President Trump’s domestic growth policies, immigration policies, import tariff policies and many others, the cumulative puzzle is leading me to believe that this company is still set to grow over the next 18-24 months, given everything I’ve gathered.
Hence, the “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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