A Bet on TNB

Looking through my screens recently, I came across Thomas & Betts (TNB - commentary - Cramer's Take). Earnings have been consistently revised upward, to the point that its Zacks rank (a measure of earnings estimate revision) jumped from average to the best last week. The latest revision trend puts it among the top 5% of stocks in terms of earnings revision.

All the good news, however, has been falling on deaf ears. The stock is down nearly 30% from its July 2007 peak. As a result, it is now trading at 12 times estimated 2008 earnings per share, and offering a free cash flow yield of 7.8% based on trailing-12-months free cash flow.

Sensitive to the Economy?

It isn't hard to figure out why the stock is down. The company operates in three segments -- electrical, steel structures and HVAC (heating, ventilation and air conditioning) -- but more than 80% of total revenues comes from electrical.

According to the company's 10K, "Demand for electrical products follows general economic conditions and is sensitive to activity in construction markets, industrial production levels and spending by utilities for replacements, expansions and efficiency improvements." I'm not too worried about spending by utilities, but those first two revenue drivers certainly give one pause.

Starting with activity in construction markets, we all know that housing starts have cratered.

Housing Starts

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Source: Data360.org, U.S. Department of Commerce, Census Bureau

Turning to industrial production ... well, it ain't looking so hot either.

Year-Over-Year Change in Industrial Production Index

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Source: St. Louis Federal Reserve; William A. Trent

So if Thomas & Betts' business is sensitive to construction activity and housing starts, one might infer that sales have taken a similar turn. But one would be wrong.

Sales for the electrical segment rose more than 12% in the first nine months of 2007, ahead of the overall company average. In the third quarter, the gain was 18.5%, though this was driven in large part by the acquisition of the Joslyn Hi-Voltage and Power Solutions businesses from Danaher (DHR - commentary - Cramer's Take) in July 2007. On a pro-forma basis, growth assuming continuous ownership of Joslyn would have been 10% for the third quarter and 7% for the first nine months.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.