Construction Slowdown Doesn't Bode Well for Thomas & Betts

Thomas & Betts Corporation (TNB) is one of those companies you’d think would be a solid pick. TNB designs and manufactures electrical connectors and other products used to deliver power, an area where you’d think there’d be continuing demand. The main industries TNB services are construction, utilities, and industrial MRO (maintenance, repair, and operations). In addition to its electrical division (which accounts for 80% of sales), Thomas & Betts has a steel structures division and a heating, ventilation, and air-conditioning division [HVAC].

For a couple of years now, TNB has been benefiting from the construction boom in America and elsewhere (they are in about twenty countries). Revenues have continued to climb, and the 2nd quarter of 2006 brought solid growth over the same quarter from the previous year, and over the first quarter of 2006. The stock is trading just below $50, up from the low $30s of about a year ago, and down from a 52-week high above $60, which came in May.

Most readers of my blog know that when a stock is nearly 20% off its 52-week high, especially in a sector involving energy, I recommend buying. But I think this one is going to go lower, and I’d hold off for a while.

The primary reason for my thinking is that Thomas & Betts has been so reliant on the construction boom for its growth. But the news from construction companies hasn’t been so good of late, and with interest rates high and likely to climb, I don’t see any renewal of construction anytime soon. My guess is this is going to hold the company back for a few more months, and that we’ll see some lower results that will drive the price down.

If I’m right about this, though, I think this could be a good stock to buy at the right price. TNB can’t control this kind of cyclical retraction, but it’s acting wisely on the things it can control. The company started a restructuring effort in 2000, which has improved margins and efficiency, and it has also enjoyed strong compounded annual sales growth compared to its competitors, Hubbell and Cooper. The company also has lots of cash ($250 million) on hand to make acquisitions to fuel growth down the road.

Type of stock: A reliable and well-managed company that depends on cyclical businesses for its revenues and is about to enter a down cycle.

Price target: I think the price is too high at $50. If it drops into the low $40s, I might start thinking about it, but if you can grab it below $40, I’d jump on this one and hold it until construction starts up again.

TNB 1-yr Chart