We Uncovered This Hidden Treasure from Financial Pros

When you change a lightbulb, do you ever think about where the wiring came from?

Probably not, but you should.

Encore Wire (WIRE) is one of the best kept secrets, and lately, a top search amongst financial pros.

The electrical building wires and cables manufacturer is one of the only pure plays on this niche sector.

And you might be thinking that they’d be struggling with copper prices so high right now.

However, the stock trades at less than 5x operating cash and is expected to grow in the low single digits next year.

It might not be the sexiest stock out there, but we feel it’s sitting on the precipice of some serious growth.

And here’s why…

Encore Wire’s Business

Making copper and aluminum wire might not seem all that exciting. But for Encore, it’s become a $3 billion a-year business.

Started in 1989, manufactures and sells its electrical wiring and cables to wholesale distributors.

This is basically how their business works:

Source: Encore Investor Presentation

While copper prices factor into the company’s materials costs, it often raises prices to compensate, creating a spread, which is its profitability.

Overall, Encore’s done a great job of increasing prices faster than their costs.

You see, copper prices aren’t expected to decline anytime soon. We face a structural deficit with stagnant supply and growing demand.

Source: Encore Investor Presentation

The whole renewable energy push? That’s driving heavy orders, allowing Encore to charge high prices.

Encore reported Q1 earnings that missed topline estimates by $23.5 million, landing at $660.5 million, while earnings of $6.50 beat by $0.75.

That said, the company expects to increase prices on upcoming contract renewals to make up for the decline in margins.

Financials

Source: Stock Analysis

Encore’s revenues jumped in 2021 as copper prices, and volumes exploded.

Gross margins sit at record levels of 36.3%, trickling down all the way to cash, where they generate free cash flow of $392 million per year.

Management has used that to repurchase shares and pay out a fairly tiny dividend.

With more cash than debt, the company can continue this strategy into the foreseeable future.

Valuation

Source: Seeking Alpha

There aren’t any companies that truly compare to Encore. 

In fact, when compared to other electronic equipment and parts manufacturers, they’re cheaper by a mile.

Growth

Source: Seeking Alpha

In terms of growth, WIRE isn’t expected to see revenues rise that much in 2023 compared to any of its peers. Hubbell (HUBB) is the closest and is still expected to grow sales by 10%.

However, if you look back over the last few years, WIRE was easily on par with the best of them.

Profitability

Source: Seeking Alpha

Right now, WIRE holds the second best gross margins only behind Badger Meter (BMI). However, it runs a lower overhead, helping it deliver a net income margin 10% higher than BMI or HUBB, both of which are established businesses.

Our Opinion 8/10

Some analysts believe Encore is at the top of a cycle where it’s only a matter of time before demand and the price of copper drops.

That’s entirely possible, but for investors, also predictable.

Since we can follow the price of copper as well as construction demand, it should be pretty clear if and when the turn would happen.

That’s why we don’t have a problem owning it here.

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