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Zack’s Bull of the Day: Belden

Belden Inc. (NYSE:BDC) is a $3.75 billion manufacturer of electronic cable and connectivity products for industrial, enterprise, broadcasting, specialty electronics and data networking markets. Founded in 1902, the company was a pioneer in the advent of wire and cable innovations for electricity and telecommunications from its early days in Chicago.

Based in St. Louis, Missouri now, Belden has manufacturing capabilities in North America, Europe, and Asia, and a market presence in nearly every region of the world. The company’s business is structured in four product platforms: industrial connectivity, industrial IT, enterprise connectivity and broadcast.

The connectivity business includes a wide range of copper, fiber and coaxial cable solutions and fiber and copper connectors for the enterprise, broadcast and industrial markets.

The networking business is made up of intelligent wired and wireless products that include Industrial Ethernet switches and related equipment, fiber optic interfaces and media converters used to bridge fieldbus networks over long distances as well as load-moment indicators for mobile cranes and other load-bearing equipment.

Expansion Into Cyber-Security

In December, Belden announced it would buy Tripwire, a leading global provider of advanced threat, security and compliance solutions, for $710 million. The deal will allow the companies to deliver cybersecurity solutions across industrial and broadcast markets. According to the press release…

Tripwire, a leader in security and vulnerability management, enables enterprises, service providers, manufacturers, and government agencies to confidently detect, prevent, and respond to growing security threats. This addition allows Belden to provide a vital element to its customer’s connected environments as they look to secure critical infrastructure from cybersecurity threats.

“We look forward to offering our customers one of the most comprehensive and secure network solutions in the market today. Tripwire technology paired with Belden’s application expertise across Enterprise, Industrial and Broadcast markets will position Belden as a leader in helping customers deploy and secure the ‘Internet of Things’,” said John Stroup, President and CEO of Belden.

Because the acquisition of Tripwire was immediately accretive to earnings with an estimated impact of approximately $0.65 in 2015, Belden was able to raise full-year guidance in a press release from January 5 as follows…

“As a result of this successful outcome, the company increases its guided range for 2015 adjusted revenues from $2.40 – $2.45 billion to $2.565 – $2.615 billion and adjusted income from continuing operations per diluted share from $4.70 – $5.00 to $5.35 – $5.65.”

This was the primary catalyst for upward analyst estimate revisions that pushed Belden up to a Zacks #1 Rank Strong Buy.

And it seems the acquisition was prescient with companies like FireEye (NASDAQ:FEYE), CyberArk Software (NASDAQ:CYBR), and VASCO Data Security International (NASDAQ:VDSI) — my Bull of the Day from February 5 — getting a lot of attention last week both for their earnings potential as well as the White House spotlight on cyber-security issues as national security priorities.

EPS Trends Crystal Clear, Despite Dollar Headwinds

On February 5, Belden reported top and bottom line beats on record revenues, profits, and margins. While full-year 2015 guidance was weaker than expectations due to FX and commodity headwinds, many analysts saw the impacts as negligible on the cyclical and secular growth drivers of the company’s businesses, of which all four segments saw increased demand strength, particularly Industrial IT.

In the fourth quarter, Belden grew revenues by 19.5% year-over-year and achieved organic revenue growth of 7.2% from the prior year period. The company expanded adjusted gross profit margins to 37.4%, increasing 220 basis points from 35.2% in the year-ago period.

For the full year 2014, Belden achieved record revenues of $2.31 billion, an increase of 11.6% year-over-year and delivered record adjusted income from continuing operations per diluted share of $4.23, up 14.6% over last year’s $3.69. This resulted in the generation of $188 million of free cash flow for the year, exceeding adjusted income from continuing operations for the 10th consecutive year.

The one rough spot of the report, as mentioned, was guidance. The Q1 2015 guide was $565-585 million, which is a decline of 5.6% from the December quarter and 4.7% below the consensus of $603 million.

Full year 2015 revenue guidance was $2.475 billion to $2.525 billion, which represents 8.3% year-over-year growth, but comes in 3.5% below the consensus of $2.591 billion.

Here’s what SunTrust analysts said in reaction…

“The only real dent on the result is that the Q1 and 2015 guide were reduced by FX (which tech investors have generally looked through this earnings season.) Thesis intact: we believe BDC is in the middle innings of a massive transformation from a low-margin, low-growth copper-linked cable company to a higher-margin, faster-growth signal transmission company.”

The analysts tweaked their 2015 estimates to account for currency and commodity impacts and reiterated their $97 price target for shares. Stifel Nicolaus analysts were also impressed with the quarter and the company’s growth plans, as they raised their price target from $92 to 97.

Who’s Buying This Transformation?

As part of my stock-picking criteria, I look at institutional buying to uncover which funds are putting how much money behind a given idea. In this way, I let the market’s “whales” do some of my homework for me because they often have deep, quantitative research teams and long time horizons.

Two big institutions increased their stakes in Belden recently with the $370 billion Wellington Management adding 475,000 shares in Q4 to bring their haul to 5.5 million shares.

And in January, a 13G filing revealed that BlackRock Inc. added over 3.5 million shares of BDC to some of its funds. Vanguard and Invesco were also both seen in 13G filings this quarter adding modestly to their 2.6 million and 2.06 million share positions, respectively.

These were my catalysts, along with the Zacks #1 Rank, to buy Belden shares for the Zacks Follow the Money (FTM) Trader portfolio this month.

I have to admit, I also like the “transformation” of an old line “wire and cable” business into a high-tech, networking, connectivity, and cyber-security solutions provider.

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