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Encore Wire To Be Hurt By Construction Drop
Although Encore Wire (Nasdaq:WIRE) has survived the residential construction market meltdown, it may see further weakness from exposure to the commercial and industrial construction markets. Encore Wire manufactures copper wire and cable used in residential, industrial and commercial construction. The company offers 6,000 products and sells mostly to wholesale distributors. (Find out how the everyday items you use can affect your investments; read Commodities That Move The Markets.)
EPS Increased in Third Quarter
In Encore Wire's earnings report for the third quarter ending September 30, revenues declined slightly year over year to $296.3 million, while earnings per share increased from 24 cents to 34 cents. Encore was able to increase earnings with strong price increases for its products during the quarter. The company has a strong balance sheet, with cash at $108.5 million and long-term debt at $101 million. (For more on deciphering this financial statement, check out Reading The Balance Sheet.)
Low-Cost Producer
Encore's strategy is simple: It wants to be the lowest-cost producer in the industry, and it tries to accomplish this in several ways. The company is fully integrated and owns a copper mill and a plastic mill. It can also recycle scrap copper created in the manufacturing process and reuse it. Encore's competitors that are not fully integrated would need to buy finished copper rods from producers like Freeport-McMoRan Copper & Gold (NYSE:FCX) and Southern Copper (NYSE:PCU).
Encore manufactures its own jackets and insulation compounds to integrate into its copper products. This also helps reduce costs. The company has centralized all manufacturing at one location in Texas, where it owns a 1.4 million-square-foot facility on 121 acres.
Copper Price Can Be Volatile
The price of copper, the company's most important raw material, can vary greatly from quarter to quarter. The price moved from $3.92 per pound at the start of the most recent quarter to $2.89 on September 30. The price of copper was 86% of the company's cost of goods sold in 2007.
Encore's core copper wire business grows 4% to 6% per year, while the armored cable market grows 8% to 12%. The company focuses on this $800 million market.
Large Shareholder
Capital Southwest (Nasdaq:CSWC) is a large shareholder of Encore Wire, owning just over 4 million shares as of September 30. Shares outstanding are approximately 23 million. Capital Southwest is a business development company that typically holds large stakes in both private and publicly held companies. Its other largest holdings include Heelys (Nasdaq:HLYS), the Alamo Group (NYSE:ALG) and Palm Harbor Homes (Nasdaq:PHHM).
Encore Wire is a well-managed and financially conservative company that prospered as it rode the growth wave of overall construction spending. While there is no doubt that the company will survive the downturn, the ride is likely to get a little rougher before business recovers.
Find out which futures, options or funds will be your perfect commodity portfolio fit in How To Invest In Commodities.
EPS Increased in Third Quarter
In Encore Wire's earnings report for the third quarter ending September 30, revenues declined slightly year over year to $296.3 million, while earnings per share increased from 24 cents to 34 cents. Encore was able to increase earnings with strong price increases for its products during the quarter. The company has a strong balance sheet, with cash at $108.5 million and long-term debt at $101 million. (For more on deciphering this financial statement, check out Reading The Balance Sheet.)
Low-Cost Producer
Encore's strategy is simple: It wants to be the lowest-cost producer in the industry, and it tries to accomplish this in several ways. The company is fully integrated and owns a copper mill and a plastic mill. It can also recycle scrap copper created in the manufacturing process and reuse it. Encore's competitors that are not fully integrated would need to buy finished copper rods from producers like Freeport-McMoRan Copper & Gold (NYSE:FCX) and Southern Copper (NYSE:PCU).
Encore manufactures its own jackets and insulation compounds to integrate into its copper products. This also helps reduce costs. The company has centralized all manufacturing at one location in Texas, where it owns a 1.4 million-square-foot facility on 121 acres.
Copper Price Can Be Volatile
The price of copper, the company's most important raw material, can vary greatly from quarter to quarter. The price moved from $3.92 per pound at the start of the most recent quarter to $2.89 on September 30. The price of copper was 86% of the company's cost of goods sold in 2007.
Large Shareholder
Capital Southwest (Nasdaq:CSWC) is a large shareholder of Encore Wire, owning just over 4 million shares as of September 30. Shares outstanding are approximately 23 million. Capital Southwest is a business development company that typically holds large stakes in both private and publicly held companies. Its other largest holdings include Heelys (Nasdaq:HLYS), the Alamo Group (NYSE:ALG) and Palm Harbor Homes (Nasdaq:PHHM).
Encore Wire is a well-managed and financially conservative company that prospered as it rode the growth wave of overall construction spending. While there is no doubt that the company will survive the downturn, the ride is likely to get a little rougher before business recovers.
Find out which futures, options or funds will be your perfect commodity portfolio fit in How To Invest In Commodities.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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