A Bet on TNB

Instead of falling off a cliff, growth accelerated in the third quarter, even after adjusting for the acquisition. So far, it is hardly looking like the company is "sensitive to activity in construction markets and industrial production levels."

More to Come

Apparently, management is finding lots of attractive acquisition opportunities out there. It increased its credit facility to $750 million in October, and in November it closed on the $450 million acquisition of Lamson & Sessions (LMS - commentary - Cramer's Take). Between 2004 and 2006, the company made cash acquisitions totaling just $50 million, so the 2007 activity marks a significant change.

It is possible that the sudden surge in acquisition activity is at least part of the reason for the decline in share price. The management team has been in place for several years but is relatively inexperienced at integrating acquired operations. Investors may be concerned that a bad acquisition will lead to operational problems and write-offs.

That may be true. But another explanation is that management saw an opportunity when the private-equity market dried up in July and is using that opportunity to bulk up their business more cheaply than they would have been able to a short time ago.

At any rate, the decline in share price appears to have anticipated at least one of the two concerns. I think from current levels it would probably require both a decline in business fundamentals and a botched acquisition to justify further share declines. If neither occurs, things could look sweet indeed.

Based on trailing earnings, TNB has traded at an average multiple of 25. The current 15 times trailing multiple is its lowest in five years. If the company can earn the expected $4.03 in 2008 and maintain its current (five-year low) valuation multiple, it could reach $61 by year-end. At its average multiple, the $4.03 in earnings would be worth more than $100.

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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.