Encore Wire ($WIRE) is an Undervalued and Low-Risk Commodity Play

When you think of good companies, you think of things such as growing revenue, high margins, low debt, low cost of producing goods, and being in an industry where business will likely not slow. What makes a good investment is buying into a company that is undervalued and should be priced higher based on intrinsic value and multiples. Allow me to introduce to you a company that fits these criteria: Encore Wire ($WIRE). $WIRE produces copper electrical wire that is used in electrical work. The moat with this company comes from the vertical integration of their supply chain. It is with low overhead cost that allows $WIRE to supply their own copper through recycling without middleman risk. This allows them to ramp up or down supply according and flexibly reducing excess inventory and increasing order fill rates. This has allowed them to remain a low cost business and increase profitability. Even as the price of copper fluctuates (heavy increase during pandemic along with most commodities), that changing cost is reflected on the buyer side (the electrical contractors who are buying the wire). Let's look at some of the key fundamentals: P/E TTM = 4.07 (2021 Diluted EPS = 26.22 per share) EV/EBITDA TTM = 2.39 P/S = .84 Net debt of $0 despite having open credit facilities and ramping up CAPEX QoQ Doubled share buyback program from $1M to $2M 34% gross margins, 26% operating margin, 43% ROA, 49% ROE Cash on Hand = $439M per Q4 2021 Q2 -> Q4 2021 revenue has been dipping after a stark increase in 2020, but after a 30% sell off in the share price this seems like a good entry. This is absolutely a cyclical play, so paying attention to the macroeconomic backdrop of the US/World is 1000% necessary. Although a rising rate environment is negative to most cyclical businesses, the vertical integration of $WIRE and low cost/debt makes this company stand out. Assuming revenue levels out with 0% growth here on out, and even taking it further and assuming a -1% or -2% revenue decline, a fair price for the company still clocks in around $150.

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Encore Wire ($WIRE) is an Undervalued and Low-Risk Commodity Play

bullish

When you think of good companies, you think of things such as growing revenue, high margins, low debt, low cost of producing goods, and being in an industry where business will likely not slow. What makes a good investment is buying into a company that is undervalued and should be priced higher based on intrinsic value and multiples. Allow me to introduce to you a company that fits these criteria: Encore Wire ($WIRE).


$WIRE produces copper electrical wire that is used in electrical work. The moat with this company comes from the vertical integration of their supply chain. It is with low overhead cost that allows $WIRE to supply their own copper through recycling without middleman risk. This allows them to ramp up or down supply according and flexibly reducing excess inventory and increasing order fill rates. This has allowed them to remain a low cost business and increase profitability. Even as the price of copper fluctuates (heavy increase during pandemic along with most commodities), that changing cost is reflected on the buyer side (the electrical contractors who are buying the wire).


Let's look at some of the key fundamentals:

  1. P/E TTM = 4.07 (2021 Diluted EPS = 26.22 per share)
  2. EV/EBITDA TTM = 2.39
  3. P/S = .84
  4. Net debt of $0 despite having open credit facilities and ramping up CAPEX QoQ
  5. Doubled share buyback program from $1M to $2M
  6. 34% gross margins, 26% operating margin, 43% ROA, 49% ROE
  7. Cash on Hand = $439M per Q4 2021



Q2 -> Q4 2021 revenue has been dipping after a stark increase in 2020, but after a 30% sell off in the share price this seems like a good entry. This is absolutely a cyclical play, so paying attention to the macroeconomic backdrop of the US/World is 1000% necessary. Although a rising rate environment is negative to most cyclical businesses, the vertical integration of $WIRE and low cost/debt makes this company stand out. Assuming revenue levels out with 0% growth here on out, and even taking it further and assuming a -1% or -2% revenue decline, a fair price for the company still clocks in around $150.

read-time
1 min
150.00
Target Price
8/ 10
Confidence
6-12 Months
Timeframe
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