Hughes Supply: ready to rebound
By Industrial Distribution Staff -- Industrial Distribution, 11/1/1999
Like many industrial distributors, Hughes Supply recently posted slower than historical earnings growth, attributable in part to commodity price deflation and significant incremental expenditures on information and telecommunications systems. Additionally, Hughes has moderated its traditionally aggressive acquisition appetite, pending conversion of its new Unix and information technology based platform.Hughes possesses a strong growth history, with a compound annual growth rate in diluted earnings per share of 29.1 percent between fiscal 1993 and 1998 (January fiscal year end). However, fiscal 1999 EPS increased at the slower rate of 9.3 percent to $2.55, having been reduced by approximately 38 cents per share due to commodity price deflation and information technology expenditures. We project fiscal 2000 EPS to rise 7.4 percent to $2.74.
As one might expect, slower earnings growth has been associated with a lower price/earnings multiple, triggering a stock price decline. Year-to-date, Hughes' stock price has fallen 20.1 percent to $23.375 (on October 12). Longer term, we suspect Hughes has considerable hidden future earnings potential. First, profits should improve as lower priced average cost inventory is sold into a rising price marketplace. Second, earnings should improve as future IT conversion costs diminish. Third, completion of its IT project should provide Hughes with a solid platform to once again become an active consolidator within this fragmented industry. As these events materialize, they should further have a positive impact on Hughes' valuation.
Jeffrey Germanotta is senior vice president of equity research at R.W. Baird & Co. He can be reached at 414-765-3572, or e-mailed at jgermanotta@rwbaird.com
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