Belden has by far and away the #1 market share in its broadcast solutions space. They
have made a series of acquisitions in order to roll up end to end coverage of everything
from the camera connection, through networking and connectivity, monitoring & editing,
and more. This business has above corporate average profitability, requires little capital,
and is forecast to grow 5-7% in the medium term.
Enterprise connectivity and industrial connectivity are the two lowest margin and lowest
growth businesses for Belden, comprising about 45% of sales. About 2/3 of this group,
or 30% of total revenues, are lower margin cabling assets. 1/3 of this group is more
differentiated, higher margin networking and connectivity assets, and the business is
definitely mixing in this direction. Overall, the connectivity group is basically the cash
cow for the company.
The industrial IT group is small, but it is growing very quickly, very profitable, and
consists of highly differentiated assets mainly in industrial networking and connectivity.
Finally, Belden acquired Tripwire in January of this year. While ostensibly a big
departure from their traditional businesses, the bet on Trip is that Belden’s industrial and
broadcast customers have not secured their endpoints, and as they increasingly connect
their capital equipment to their networks they will require additional layers of security.
Belden will be able to cross sell endpoint security along with its connectivity and
networking gear. Admittedly this acquisition is further afield than most had expected to
see from Belden, but the two companies had been co-selling for over a year before the
deal was announced (meaning that they wouldn’t have acquired Trip if their partnership
hadn’t demonstrated success beforehand) and so far it is tracking ahead of expectations.
The net takeaway here is that Belden used to be a company with little barriers to entry
and no competitive moat, but now it has transformed itself into a highly differentiated
business with dominant competitive positions, high barriers to entry, much improved
profitability and returns, and far better growth. In spite of these changes, the stock is
still being valued as if it is still a commodity company, inline with much lower quality
companies like General Cable.
Margins and Cash Flows
Operating margins have already expanded from 9% in 2010 up to 14% in 2014, and
management has laid out a medium term target calling for continued expansion to the 16-
18% range. However, with the addition of a software company like Tripwire, continued
mix shifts away from commodity offerings and towards differentiated solutions, and
further efficiency gains I think a 20% operating margin target is a real possibility further
on down the road. Operating margin expansion stories are a real source of alpha in tech,
and if Belden can in fact expand margins at a clip of 100bps per year going forward I
think it is likely the stock outperforms by a good margin.
Returns on invested capital have been pretty stable at around 14% annually for a number
of years. Management runs the business for ROIC over time, and they have a strong
capital allocation discipline where they are focused on the highest ROIC projects
available, whether that’s organic investment, acquisitions, buybacks etc. I would
anticipate that ROIC will trend upwards along with operating margins over time. The