BUSINESS
Encore Wire Corporation manufactures and sells electrical building wires and cables for interior electrical wiring in the United States. The company’s products include NM-B cables for use as interior wiring in homes, apartments, and manufactured housing; THHN/THWN-2 cables and metal-clad and armored cables for use as wiring in commercial and industrial buildings; UF-B cables; XHHW-2 cables; RHH/RHW-2 cables; USE-2 cables; and other types of wire products. It sells its products to wholesale electrical distributors primarily through independent manufacturers’ representatives. Encore Wire Corporation was incorporated in 1989 and is headquartered in McKinney, Texas.
INVESTMENT RATING
WIRE’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a Value Builder.
Encore Wire has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Encore Wire has a good Appreciation Score of 70 and a good Power Rating of 80, leading to the Highest Value Trend Rating.
Encore Wire’s stock is selling well below targeted value. The current stock price of $236.34 compares to targeted value 12 months forward of $494.
Encore Wire’s high appreciation potential results in an appreciation score of 70 (only 30% of the universe has greater appreciation potential.)
Encore Wire has a Power Rating of 80. (This good Power Rating indicates that WIRE has a better chance of achieving attractive investment performance over the near to intermediate term than all but 20% of companies in the universe.)
Contributing to this good Power Rating: recent price action has been extremely favorable. Offsetting factors are earnings estimate behavior for WIRE has been slightly negative recently; and the Drawing, Insulating Nonferrous Wire comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
WIRE’s financial strength is exceptional. Financial strength rating is 98.
Relative to the S&P 500 Composite, Encore Wire Corp has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that WIRE is lower risk. High stock price volatility is a relative weakness for WIRE. WIRE’s valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. WIRE has unusually low market capitalization.
CURRENT SIGNALS
Encore Wire’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.
Encore Wire’s current technical position is very strong. The stock price is in a 9.6 month up move. The stock has appreciated 56.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Positive development: significant quarterly earnings acceleration occurred. Negative development: significant quarterly sales deceleration occurred.
In light of this new information we are reviewing our current Overall Rating of A. This review will be completed in the next several days.
Encore Wire Corp (NASDAQ: WIRE) has reported E.P.S. of $4.21 for its fourth fiscal quarter (ending December 31) versus $8.43 for the same period a year ago. E.P.S. were $22.07 for the latest four quarters through December 31 versus $37.47 for the same period a year ago.
On 2/13/24, Encore Wire Corp (NASDAQ: WIRE) stock declined by -3.8%, closing at $236.34. NORMAL trading volume accompanied the decline. The stock has risen 4.5% during the last week and has been exceptionally strong relative to the market over the last nine months.
CASH FLOW
In 2022, Encore Wire generated a very significant increase in cash of +$291.6 million (+66%). Sources of cash were much larger than uses. Cash generated from 2022 EBITDA totaled +$941.1 million. Non-operating sources contributed +$10.3 million (+1% of EBITDA). Cash taxes consumed -$187.5 million (-20% of EBITDA). Re-investment in the business amounted to -$233.6 million (-25% of EBITDA). On a net basis, debt investors removed -$0.4 million (0% of EBITDA) while equity investors withdrew -$238.3 million (-25% of EBITDA).
Encore Wire’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Encore Wire Peer Group as well. In most years, Encore Wire was in the top quartile. Currently, Encore Wire is upper quartile at +1% of EBITDA (+$10.3 million).
Encore Wire’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Encore Wire Peer Group. In most years, Encore Wire was in the second quartile and top quartile. Currently, Encore Wire is below median at -20% of EBITDA (-$187.5 million).
Encore Wire’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Encore Wire Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Encore Wire was in the third quartile and top quartile. Currently, Encore Wire is upper quartile at -25% of EBITDA (-$233.6 million).
Encore Wire’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Encore Wire Peer Group as well. In most years, Encore Wire was in the second quartile and third quartile. Currently, Encore Wire is slightly above median at 0% of EBITDA (-$0.4 million).
Encore Wire’s Equity Investors, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the Encore Wire Peer Group. In most years, Encore Wire was in the top quartile and second quartile. Currently, Encore Wire is below median at -25% of EBITDA (-$238.3 million).
Encore Wire’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Encore Wire Peer Group. (Since 2020 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Encore Wire was in the top quartile. Currently, Encore Wire is upper quartile at +31% of EBITDA (+$291.6 million).
Encore Wire’s Cash, %Revenue has exhibited a minor overall uptrend over the period. This improvement was accompanied by stability for the Encore Wire Peer Group. In most years, Encore Wire was in the top quartile. Currently, Encore Wire is upper quartile at +24%.
PROFITABILITY
Encore Wire’s return on equity has improved very significantly since 2013. The current level of 26.1% is 2.54X the low for the period and is -35.4% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return and small positive trend in non-operating factors.
The productivity of Encore Wire’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend that accelerated sharply after the 2021 level.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend that accelerated from the 2022 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
Encore Wire’s return on equity is upper quartile (26.1%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is upper quartile (30.1%) reflecting asset turnover that is slightly above median (1.33X) and upper quartile pretax margin (22.7%).
Tax “keep” rate (income tax management) is at median (77.1%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.12X).
GROWTH RATES
There are no significant differences between Encore Wire’s longer term growth and growth in recent years.
Encore Wire’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 11.7% per year.
Total asset growth has been 15.7% per year.
Annual E.P.S. growth has been 34.0% per year.
Equity growth has been 16.1% per year.
Encore Wire’s consensus growth rate forecast (average of Wall Street analysts) is 11.0% — substantially below the average of the historical growth measures.
Relative to the Encore Wire Peer Group, Encore Wire’s historical growth measures are consistently top quartile. E.P.S. growth (34.0%) has been upper quartile. Total asset growth (15.7%) has been upper quartile. Equity growth (16.1%) has been upper quartile. Revenue growth (11.7%) has been at the upper quartile.
In agreement with this pattern, consensus growth forecast (11.0%) is at median.
PRICE HISTORY
Over the full time period, Encore Wire’s stock price performance has been variable and exceptional. Between April, 2013 and February, 2024, Encore Wire’s stock price rose +622%; relative to the market, this was a +133% gain. Significant price move during the period: 1) March, 2020 – December, 2021: +241%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 39.8% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 39.8% is upper quartile relative to Encore Wire Corp Peer Group.
Current 5-year total return performance of 33.3% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 33.3% relative to S&P 500 Composite, Encore Wire’s total return performance is upper quartile relative to Encore Wire Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, WIRE’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is above median. Price/equity ratio is near the lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Relative to Encore Wire Peer Group, WIRE’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is at the upper quartile. Ratio of enterprise value/revenue is at the upper quartile. Price/equity ratio is slightly above median. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Encore Wire has a very large value gap compared to the median valuation. For WIRE to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.42X to 0.96X. If WIRE’s ratio of enterprise value/revenue were to fall to 0.96X, its stock price would be lower by $-77 to $160.
For WIRE to fall to lower quartile valuation relative to the Encore Wire Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.42X to 0.74X. If WIRE’s ratio of enterprise value/revenue were to fall to 0.74X, its stock price would decline by $-114 from the current level of $236.
VALUE TARGETS
WIRE’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a Value Builder.
Encore Wire’s current Price Target of $501 represents a +112% change from the current price of $236.34.
This high appreciation potential results in an appreciation score of 70 (only 30% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 70, the high Power Rating of 80 contributes to an Value Trend Rating of A.
Encore Wire’s current Price Target is $501 (-35% from the 2022 Target of $765 but +112% from the 02/13/24 price of $236.34). This dramatic fall in the Target is the result of a +30% increase in the equity base and a -50% decrease in the price/equity multiple. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 11.8% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is well above the 2016 low of 6%.
PTR’s growth forecast is 30.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2014 and 2022. The current forecast is significantly above the 2017 low of 6%.
PTR’s cost of equity forecast is 8.7% — below recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2014 and 2022. The current forecast is above the 2015 low of 4.4%.
At Encore Wire’s current price of $236.34, investors are placing a positive value of $1567 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 26.0% per year, and a return on equity of 31.8% versus a cost of equity of 16.1%.
PTR’s 2024 Price Target of $501 is based on these forecasts and reflects an estimated value of existing assets of $283 and a value of future investments of $218.
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