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Two important questions to ask before you buy Hubbell Incorporated (NYSE:HUBB) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of HUBB’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
View our latest analysis for Hubbell
What is free cash flow?
Hubbell’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Hubbell to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Hubbell’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Hubbell’s yield of 2.74% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Hubbell but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Hubbell?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at HUBB’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 48%, ramping up from its current levels of US$400m to US$590m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, HUBB’s operating cash flow growth is expected to decline from a rate of 29% in the upcoming year, to 5.1% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Hubbell relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Hubbell to get a more holistic view of the company by looking at: