Description

Belden, Inc. (NYSE:BDC) is a networking solutions company that builds systems for the transmission of data, sound, and video. Belden serves two primary end markets: Enterprise and Industrial.  Enterprise (~45% of sales, ~40% of EBITDA) provides cabling and connectors for non-residential construction and residential construction / service installation, as well as media production equipment for live sports and news. Industrial provides similar cabling and connectivity products, in addition to networking and software products, for manufacturing automation.  The company is geographically diversified, with ~45% of sales from outside the U.S. The company’s largest distributor is Anixter (~15% of revenues). The company’s main Enterprise customers are MSOs like Comcast, and its main Industrial customers are automated manufacturing providers like Rockwell and Siemens.  The company is headquartered in St. Louis, Missouri with 27 manufacturing facilities and 6 warehouses spread all over the world, employing ~6,400 workers.

Belden is a “self-help” story as management pivots the company toward higher-growth, higher-margin businesses, reduces costs, improves operating efficiency, and deleverages. Belden is divesting broadcast products and copper-dominated commodity-like products (cables). Instead, management is focusing on enabling components and software to leverage growth in industrial automation, broadband/5G, and smart buildings / data centers.

·        Key Challenges:

o   Short thesis has won out: BDC has historically pitched itself as a high-quality connectivity company powered by strong secular trends, but in fact has been mainly a copper-based cabling and connectivity company with no growth.  The company has added leverage in order to grow at just a LSD-MSD inorganic rate.  BDC is still well below its peak of $95.14 in April 2015. The company tried to solve for sales declines through a series of acquisitions in 2019, followed by the last acquisition of OTN Systems in 2021, but the COVID crisis has been another blow, so the impact of on revenues is not measurable yet.

o   Debt load: BDC carries long-term debt of $1.8 billion and cash on hand of ~$400 million, for $1.4B net debt. LT debt has grown due to M&A activity, helping the company to increase revenues from $189M in 1995 to $1.3B in 2005, and to $ 2.3B in 2019, before COVID. Notably, the cash payout ratio in relation to interest expenses and dividend expenses is low (30%-50%), which has allowed the company to continue an M&A campaign at a difficult time such as the COVID pandemic, financing acquisitions with cash from operations. Furthermore, the company still has enough cash to deleverage its balance sheet.

o   Competition: there’s ample competition, ranging from Prysmian (OTCPK:PRYMY) in cables to Amphenol (NYSE:APH) in connectors to CommScope (NASDAQ:COMM) in broadband/5G/data centers and Qualys (NASDAQ:QLYS) in vulnerability management. Still, the market does not seem to be giving Belden full credit for its ongoing transformation.

·        Value Drivers:

o   Strong margin profile. BDC has  a healthy ~35% gross profit margin which has been stable over time. Management has laid out a target of 20% EBITDA margin, against recent margins in the low-to-mid teens. The 20% margin could be attainable in 2025, but a lot depends upon how quickly the copper assets are sold and what sort of traction the company gets with higher-margin offerings. Long term, these moves can drive FCF margins into the low-double-digits, magnifying that 4% to 5% revenue growth into high single-digit to low double-digit EBITDA growth.

o   Simplifying the business: Belden announced a three-step transformation at the prior analyst day and it is tracking well. The Grass Valley divestiture is complete (step 1) and SG&A cost-cutting already approaching a $60 million annual run-rate through 2021 -  ahead of the initial $40 million target (step 2). Finally, the targeted divestitures of ~$200 million in the copper cabling business are ongoing (step 3). The updated timeline is positive and paves the way toward Belden becoming a more simplified, higher-margin business.

o   Automation Trends Driving 4-5% Revenue Growth:  automation demand has picked up above 2019 pre-COVID levels, as the pandemic has brought home its importance. For industrial automation, Belden offers a range of cables, connectors, modules, and networking components which are essential for an automated shop floor, as they control and carry the power and command signals. In bandwidth/5G, Belden is focused on fiber, connectivity products, and switches for last-mile, cellular backhaul, 5G, and inside-the-home broadband. Even as more in-home and in-building connectivity moves to wireless, there are still often wired components that play essential roles. Likewise in smart buildings, where the company provides various types of cabling (including Cat 6A for power over Ethernet) and connectivity products for connected buildings (automated lighting, climate control, security, et al), and data centers.

Financials:

·        Recent Highlights:

o   Q2 2021:

o   Management Goals:

o   EBITDA margin path:

o   Debt Schedule:

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Catalyst

* Margin improvement (self-help)

* Divestitures / business simplification

* Re-emphasis on automation & reduction of commoditized products