I think this one is a sell at the moment though. I believe margins are rapidly headed back to 10% and the stock is likely to overreact to the downside. Below $100 per share, I agree this is a buy due to secular trends, but not at current prices.
Margins are inflated because copper price volatility and shortages made price comparisons difficult. As copper prices stabilize, regardless of the level, buyers of commodity cabling will drive margins down to 10% within a year. I don’t buy management’s story that customer service will enable them to maintain higher margins.
It's a fair take, and youre not alone in viewing this thesis. Much of the margin compression is already priced in. When you play with a DCF and input flat topline and 10% EBITDA margins from 2024 and beyond, it only calculates to $157 FV on my end. Sure there could be an over-reaction. But $100 would be far too low for the stock.
I'm not a big fan of DCF. Always feels too "beauty is in the eye of the beholder" to me.
I did a very simple PE multiple analysis. I assumed they bought back their full share authorization, which gets me ~16M shares outstanding. Pre-covid net income was ~$70M, so call it $4.5 per share. Add $1 for accretive capex, and apply the high end historical PE multiple of 15.
$5.5 x 15 = $82 per share. That's a reasonable valuation in a competitive margin environment.
Higher copper prices shouldn't translate to permanently higher wire manufacturing margins. If copper prices stabilized at $4 per lb., WIRE margins should be smaller as a % of sales compared to when copper was $2 per lb., but the absolute profit in terms of $s should be similar. I think they're headed back to $100M per year in earnings.
I was thinking the same.an italian stock Just did the same:great revenue and margins for external factors and the back to normale,the stock Lost 30% in One day.I really like the Capital allocation and the big cash situation(m&a can work )but I would like to see buy back as sono as the stock drop
WIRE was pretty aggressive in Q2'23 (ended June 30) by buying back 4.6% of the outstanding at ~$164. I suspect they were similarly aggressive in Q3'23. We'll know in a month.
What's sort of things did you see that were concerning and how recent were they? I know Encore has made some investments in the facilities to make for a better employee experience. Last August, CEO Daniel Jones said during a fireside chat:
"We committed to a while back, the process of improving and attracting the talent that we need from the area. We retrofitted an existing building to a state-of-the-art employee center. It houses our support for the hiring. It houses our on-site medical clinic for the employees and their families to use and utilize. We do our pre-employment testing on-site in that employee center. We have a chaplain service that we use through the employee center. We're able to provide hands-on training in the back of the employee center, and continuing to try to do what we can do to not only attract fantastic talent as we grow, but provide some services for retention of the employees that we have.
They appreciate that investment. They can see that investment, and it's already paying dividends. The quality of the candidates that we're getting today versus 6 or 8 months ago is drastically improved. A lot fewer drug test failures and some of the other data points we could share." The last part to me indicates they are being recognized for improving the willingness to work at Encore.
Great Writeup, Thank you for sharing this :) Just wondering if you have looked at the high % of short interest (I think its around 18% at the moment). Is that just people betting on the stock going down due to drop in copper prices or do you think there is more to it?
A little more to it. The potential headwinds for Encore are that copper will fall, in addition to a loss of pricing power with margins quickly falling back to the prior 10 year average. Gross profit margin had been around 12%. There’s also a history of erratic competition in the past 20 years which have caused margins to decline. Perhaps it helps there’s less competitors these days.
That's a good question as that will impact margins for Encore in the future (more investment and therefore more capacity).
There's not a lot of public data on CapEx figures. As mentioned in the report, I did look at and compare Atkore. The other relevant company with some data is Prysmian (owner of General Cable). However, they're more diversified beyond electric cables. Both Atkore and Prysmian, as a whole, have increased CapEx on an absolute dollar basis, but it remains in-line with the percent of revenue, according to data from Koyfin.
In August 2022, Encore held a fireside chat. Here's a section that's relevant for your question. Brent Thielman (D.A. Davidson & Co.): "Understood. Okay. And another question that's come across a lot is the sort of visibility you have until additional manufacturing capacity being added by your peers, your competitors, to meet the higher demand in the industry. Any commentary there?"
Daniel Jones (Chairman, President & CEO, WIRE): "We don't have publicly-traded competitors anymore. We used to. When I first started in the industry, we had 30-some-odd competitors. We're down to maybe 6 or 7 in the markets that we serve today on a consistent basis. And for the most part, best we can gather, all of the manufacturers we compete with are running all of their manufacturing locations. Most of our competitors have more than one location. They're all running. They're shipping. They're doing the things that they do. There's some machinery that's being swapped out with a few competitors. There's a few orders that we've seen or heard about through third parties.
As far as purchases, nothing has been significant. There's some raw material productivity changes. Our largest -- Southwire is our largest competitor in Carlton, Georgia, and they've been pretty public about building a new copper rod production facility. But as far as building wire capacity in the markets that we serve, we're not aware of any large or huge projects to address capacity issues at this time.
Everybody is running. There's constant upgrades to equipment. And as equipment gets old and you swap it out for various reasons, what have you, but I don't know of any real large-scale capacity increases on any of our competitors."
Appreciate the write up.
I think this one is a sell at the moment though. I believe margins are rapidly headed back to 10% and the stock is likely to overreact to the downside. Below $100 per share, I agree this is a buy due to secular trends, but not at current prices.
Margins are inflated because copper price volatility and shortages made price comparisons difficult. As copper prices stabilize, regardless of the level, buyers of commodity cabling will drive margins down to 10% within a year. I don’t buy management’s story that customer service will enable them to maintain higher margins.
It's a fair take, and youre not alone in viewing this thesis. Much of the margin compression is already priced in. When you play with a DCF and input flat topline and 10% EBITDA margins from 2024 and beyond, it only calculates to $157 FV on my end. Sure there could be an over-reaction. But $100 would be far too low for the stock.
Thanks.
I'm not a big fan of DCF. Always feels too "beauty is in the eye of the beholder" to me.
I did a very simple PE multiple analysis. I assumed they bought back their full share authorization, which gets me ~16M shares outstanding. Pre-covid net income was ~$70M, so call it $4.5 per share. Add $1 for accretive capex, and apply the high end historical PE multiple of 15.
$5.5 x 15 = $82 per share. That's a reasonable valuation in a competitive margin environment.
Higher copper prices shouldn't translate to permanently higher wire manufacturing margins. If copper prices stabilized at $4 per lb., WIRE margins should be smaller as a % of sales compared to when copper was $2 per lb., but the absolute profit in terms of $s should be similar. I think they're headed back to $100M per year in earnings.
I was thinking the same.an italian stock Just did the same:great revenue and margins for external factors and the back to normale,the stock Lost 30% in One day.I really like the Capital allocation and the big cash situation(m&a can work )but I would like to see buy back as sono as the stock drop
WIRE was pretty aggressive in Q2'23 (ended June 30) by buying back 4.6% of the outstanding at ~$164. I suspect they were similarly aggressive in Q3'23. We'll know in a month.
Great write up, thank you CI.
$WIRE is not unionized but I found their Glassdoor employee reviews concerning.
What's sort of things did you see that were concerning and how recent were they? I know Encore has made some investments in the facilities to make for a better employee experience. Last August, CEO Daniel Jones said during a fireside chat:
"We committed to a while back, the process of improving and attracting the talent that we need from the area. We retrofitted an existing building to a state-of-the-art employee center. It houses our support for the hiring. It houses our on-site medical clinic for the employees and their families to use and utilize. We do our pre-employment testing on-site in that employee center. We have a chaplain service that we use through the employee center. We're able to provide hands-on training in the back of the employee center, and continuing to try to do what we can do to not only attract fantastic talent as we grow, but provide some services for retention of the employees that we have.
They appreciate that investment. They can see that investment, and it's already paying dividends. The quality of the candidates that we're getting today versus 6 or 8 months ago is drastically improved. A lot fewer drug test failures and some of the other data points we could share." The last part to me indicates they are being recognized for improving the willingness to work at Encore.
Great Writeup, Thank you for sharing this :) Just wondering if you have looked at the high % of short interest (I think its around 18% at the moment). Is that just people betting on the stock going down due to drop in copper prices or do you think there is more to it?
A little more to it. The potential headwinds for Encore are that copper will fall, in addition to a loss of pricing power with margins quickly falling back to the prior 10 year average. Gross profit margin had been around 12%. There’s also a history of erratic competition in the past 20 years which have caused margins to decline. Perhaps it helps there’s less competitors these days.
Very nice write up. Do you have any indications about the cap ex of the competitors that you mentioned in the report? thanks a lot Steve
That's a good question as that will impact margins for Encore in the future (more investment and therefore more capacity).
There's not a lot of public data on CapEx figures. As mentioned in the report, I did look at and compare Atkore. The other relevant company with some data is Prysmian (owner of General Cable). However, they're more diversified beyond electric cables. Both Atkore and Prysmian, as a whole, have increased CapEx on an absolute dollar basis, but it remains in-line with the percent of revenue, according to data from Koyfin.
In August 2022, Encore held a fireside chat. Here's a section that's relevant for your question. Brent Thielman (D.A. Davidson & Co.): "Understood. Okay. And another question that's come across a lot is the sort of visibility you have until additional manufacturing capacity being added by your peers, your competitors, to meet the higher demand in the industry. Any commentary there?"
Daniel Jones (Chairman, President & CEO, WIRE): "We don't have publicly-traded competitors anymore. We used to. When I first started in the industry, we had 30-some-odd competitors. We're down to maybe 6 or 7 in the markets that we serve today on a consistent basis. And for the most part, best we can gather, all of the manufacturers we compete with are running all of their manufacturing locations. Most of our competitors have more than one location. They're all running. They're shipping. They're doing the things that they do. There's some machinery that's being swapped out with a few competitors. There's a few orders that we've seen or heard about through third parties.
As far as purchases, nothing has been significant. There's some raw material productivity changes. Our largest -- Southwire is our largest competitor in Carlton, Georgia, and they've been pretty public about building a new copper rod production facility. But as far as building wire capacity in the markets that we serve, we're not aware of any large or huge projects to address capacity issues at this time.
Everybody is running. There's constant upgrades to equipment. And as equipment gets old and you swap it out for various reasons, what have you, but I don't know of any real large-scale capacity increases on any of our competitors."