Rating Update: Stock Rating C-Neutral (6/11/19)-Houston Wire & Cable Co (HWCC).

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BUSINESS

Houston Wire & Cable Company, through its subsidiaries, sells electrical and mechanical wire and cable, industrial fasteners, hardware, and related services in the United States. It offers wire and cable products, including continuous and interlocked armor cables; control and power cables; electronic wires and cables; flexible and portable cords; instrumentation and thermocouple cables; lead and high temperature cables; medium voltage cables; and premise and category wires and cables, primary and secondary aluminum distribution cables, and steel wire ropes and wire rope slings, as well as synthetic fiber rope slings, chains, shackles, and other related hardware and corrosion resistant products. The company also provides private branded products comprising its proprietary brand LifeGuard, a low-smoke zero-halogen cable.
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INVESTMENT RATING

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HWCC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.

Houston Wire & Cable has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Houston Wire & Cable has a good Appreciation Score of 78 but a poor Power Rating of 19, triggering the Neutral Value Trend Rating.

Houston Wire & Cable’s stock is selling well below targeted value. The current stock price of $5.40 compares to targeted value 12 months forward of $11.
Houston Wire & Cable’s high appreciation potential results in an appreciation score of 78 (only 22% of the universe has greater appreciation potential.)
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Houston Wire & Cable has a Power Rating of 19. (HWCC’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 19% of companies in the universe.)
Factors contributing to this poor Power Rating include: is in an extremely unfavorable position current; and recent price action has been unfavorable. An offsetting factor is earnings estimate behavior for HWCC has been slightly favorable recently.

INVESTMENT PROFILE

HWCC’s financial strength is average. Financial strength rating is 47.
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Relative to the S&P 500 Composite, Houston Wire & Cable Co has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that HWCC is higher risk. High expected growth is a positive for HWCC. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low historical growth, and high earnings variability. HWCC’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. HWCC has unusually low market capitalization.

CURRENT SIGNALS

Houston Wire & Cable’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.

Houston Wire & Cable’s current technical position is very weak. The stock price is in a 4.0 month down move. The stock has declined 15.7% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Houston Wire & Cable Co (NASDAQ: HWCC): negative upside/downside volume developed.
The stock is currently rated C.
Houston Wire & Cable Co (NASDAQ: HWCC) stock suffered a major decline of -31.9% on 6/11/19. The shares closed at $2.11. Moreover, this decline was accompanied by above average trading volume at 142% of normal. The stock has been weak relative to the market over the last nine months but has risen 2.1% during the last week.

CASH FLOW

In 2018, Houston Wire & Cable generated a very significant increase in cash of +$1.39 million (). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$16.14 million. Non-operating uses consumed -$0.06 million (-0% of EBITDA). Cash taxes consumed -$2.77 million (-17% of EBITDA). Re-investment in the business amounted to -$8.07 million (-50% of EBITDA). On a net basis, debt investors pulled out -$5.15 million (-32% of EBITDA) while equity investors furnished +$1.30 million (+8% of EBITDA).
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HWCC’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Houston Wire & Cable Co Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Houston Wire & Cable was in the top quartile and lower quartile. Currently, Houston Wire & Cable is at the upper quartile at -0% of EBITDA (-$0.06 million).

HWCC’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Houston Wire & Cable Co Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Houston Wire & Cable was in the lower quartile. Currently, Houston Wire & Cable is lower quartile at -17% of EBITDA (-$2.77 million).

HWCC’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Houston Wire & Cable Co Peer Group. In most years, Houston Wire & Cable was in the top quartile and lower quartile. Currently, Houston Wire & Cable is slightly above median at -50% of EBITDA (-$8.07 million).

HWCC’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Houston Wire & Cable Co Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Houston Wire & Cable was in the top quartile and third quartile. Currently, Houston Wire & Cable is below median at -32% of EBITDA (-$5.15 million).

HWCC’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Houston Wire & Cable Co Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, Houston Wire & Cable was in the lower quartile and top quartile. Currently, Houston Wire & Cable is above median at +8% of EBITDA (+$1.30 million).

HWCC’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Houston Wire & Cable Co Peer Group. In most years, Houston Wire & Cable was in the third quartile and second quartile. Currently, Houston Wire & Cable is at median at +9% of EBITDA (+$1.39 million).
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HWCC’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Houston Wire & Cable Co Peer Group as well. In most years, Houston Wire & Cable was in the lower quartile. Currently, Houston Wire & Cable is lower quartile at +0%.

PROFITABILITY

HWCC’s return on equity has eroded very significantly since 2009 although it experienced a very sharp recovery after the 2016 low.
HWCC’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of HWCC’s assets declined over the full period 2009-2019: asset turnover has experienced a minor downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2016 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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HWCC’s return on equity is at median (8.7%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at median (5.3%) reflecting asset turnover that is at the upper quartile (1.66X) and at median pretax margin (3.2%).
Tax “keep” rate (income tax management) is slightly above median (78.1%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is at the lower quartile (2.09X).

GROWTH RATES

There are no significant differences between Houston Wire & Cable’s longer term growth and growth in recent years.
Houston Wire & Cable’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 1.5% per year.

Total asset growth has been 3.8% per year.

Annual E.P.S. growth has been -3.8% per year.

Equity growth has been 2.1% per year.
No consensus growth rate forecast is available for Houston Wire & Cable.
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Relative to the Houston Wire & Cable Co Peer Group, Houston Wire & Cable’s historical growth measures are erratic. E.P.S. growth (-3.8%) has been substantially below median. Total asset growth (3.8%) has been at the lower quartile. Revenue growth (1.5%) has been at the lower quartile. Equity growth (2.1%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Houston Wire & Cable’s stock price performance has been variable and significantly below market. Between August, 2008 and June, 2019, Houston Wire & Cable’s stock price fell -68%; relative to the market, this was a -86% loss. Significant price moves during the period: 1) July, 2013 – December, 2015: -64%; and 2) February, 2009 – April, 2010: +121%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -36.5% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through May, 2019 of -36.5% is lower quartile relative to Houston Wire & Cable Co Peer Group.

Current 5-year total return performance of -13.4% is lower quartile relative to the S&P 500 Composite.
Through May, 2019, with lower quartile current 5-year total return of -13.4% relative to S&P 500 Composite, Houston Wire & Cable’s total return performance is substantially below median relative to Houston Wire & Cable Co Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, HWCC’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/assets, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.
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Houston Wire & Cable has no value gap compared to the median valuation. For HWCC to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.51X to 0.51X. If HWCC’s ratio of enterprise value/revenue were to rise to 0.51X, its stock price would be lower by $0 to $5.
For HWCC to hit lower quartile valuation relative to the Houston Wire & Cable Co Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.51X to 0.44X. If HWCC’s ratio of enterprise value/revenue were to fall to 0.44X, its stock price would decline by $-1 from the current level of $5.40.

VALUE TARGETS

HWCC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
Houston Wire & Cable’s current Price Target of $11 represents a +110% change from the current price of $5.40.
This high appreciation potential results in an appreciation score of 78 (only 22% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 78, the low Power Rating of 19 results in an Value Trend Rating of C.
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Houston Wire & Cable’s current Price Target is $11 (+4% from the 2018 Target of $11 and +110% from the 06/11/19 price of $5.40). This plateau in the Target is the result of a +5% increase in the equity base and a -1% decrease in the price/equity multiple. The forecasted increase in growth has a large positive impact on the price/equity multiple and the forecasted increase in return on equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 8.5% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 19%.

PTR’s growth forecast is 5.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is well below the 2011 peak of 13%.

PTR’s cost of equity forecast is 6.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2011 peak of 9.0%.
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At Houston Wire & Cable’s current price of $5.40, investors are placing a negative value of $-4 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 8.3% versus a cost of equity of 5.3%.
PTR’s 2020 Price Target of $11 is based on these forecasts and reflects an estimated value of existing assets of $9 and a value of future investments of $2.

About John Lafferty 37832 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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