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).
This rating combines consistent signals from two proprietary PTR measures of a stock’s attractiveness. Encore Wire has a slightly positive Appreciation Score of 69 and a good Power Rating of 83, resulting in the Highest Value Trend Rating.
Encore Wire’s stock is selling well below targeted value. The current stock price of $221.52 compares to targeted value 12 months forward of $443.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
Encore Wire has a Power Rating of 83. (WIRE’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 17% 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 97.
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. All factors are relative strengths. 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.
The stock is currently rated A.
Encore Wire Corp (NASDAQ: WIRE) stock closed at $221.52 on 3/6/24 after a slight decline of -0.2%. However, below average trading volume at 71% of normal accompanied the decline. The stock has declined -4.3% during the last week but has been exceptionally strong relative to the market over the last nine months.
CASH FLOW
In 2023, Encore Wire experienced a significant decline in cash of -$169.9 million (-23%). Sources of cash were lower than uses. Cash generated from 2023 EBITDA totaled +$483.3 million. Non-operating sources contributed +$33.7 million (+7% of EBITDA). Cash taxes consumed -$107.9 million (-22% of EBITDA). Re-investment in the business amounted to -$135.1 million (-28% of EBITDA). On a net basis, debt investors withdrew -$0.4 million (-0% of EBITDA) while equity investors withdrew -$443.5 million (-92% 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 +7% of EBITDA (+$33.7 million).
Encore Wire’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Encore Wire Peer Group. In most years, Encore Wire was in the third quartile and second quartile. Currently, Encore Wire is below median at -22% of EBITDA (-$107.9 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. In most years, Encore Wire was in the third quartile and second quartile. Currently, Encore Wire is slightly above median at -28% of EBITDA (-$135.1 million).
Encore Wire’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Encore Wire Peer Group. In most years, Encore Wire was in the second quartile and third quartile. Currently, Encore Wire is substantially above median at -0% of EBITDA (-$0.4 million).
Encore Wire’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Encore Wire Peer Group. (Since 2021 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Encore Wire was in the second quartile and top quartile. Currently, Encore Wire is lower quartile at -92% of EBITDA (-$443.5 million).
Encore Wire’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Encore Wire Peer Group. (Since 2021 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Encore Wire was in the top quartile and second quartile. Currently, Encore Wire is substantially below median at -35% of EBITDA (-$169.9 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 +22%.
PROFITABILITY
Encore Wire’s return on equity has improved very significantly since 2014. The current level of 21.3% is 2.83X the low for the period and is -47.3% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of Encore Wire’s assets declined over the full period 2014-2023: 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 sharply accelerated from the 2022 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
Encore Wire’s return on equity is upper quartile (21.3%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is upper quartile (24.6%) reflecting asset turnover that is slightly above median (1.30X) and upper quartile pretax margin (18.9%).
Tax “keep” rate (income tax management) is at median (76.8%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.13X).
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 14.1% per year.
Total asset growth has been 17.2% per year.
Annual E.P.S. growth has been 36.0% per year.
Equity growth has been 17.6% 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. Revenue growth (14.1%) has been upper quartile. Total asset growth (17.2%) has been upper quartile. E.P.S. growth (36.0%) has been upper quartile. Equity growth (17.6%) has been 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 May, 2013 and March, 2024, Encore Wire’s stock price rose +540%; relative to the market, this was a +104% gain. Significant price move during the period: 1) March, 2020 – December, 2021: +241%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 24.9% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 24.9% is slightly below median relative to Encore Wire Corp Peer Group.
Current 5-year total return performance of 32.5% is upper quartile relative to the S&P 500 Composite.
Through February, 2024, with upper quartile current 5-year total return of 32.5% 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 slightly above median. Price/equity ratio is near the lower quartile. Price/earnings ratio is lower quartile. Ratio of enterprise value/revenue 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 low. The highest factor, the ratio of enterprise value/assets, is at the upper quartile. Ratio of enterprise value/revenue is near the upper quartile. Price/equity ratio is slightly below 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. For WIRE to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.36X to 0.97X. If WIRE’s ratio of enterprise value/revenue were to fall to 0.97X, its stock price would be lower by $-63 to $158.
For WIRE to achieve upper quartile valuation relative to the Encore Wire Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.36X to 1.47X. If WIRE’s ratio of enterprise value/revenue were to rise to 1.47X, its stock price would increase by $18 from the current level of $222.
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 $467 represents a +111% change from the current price of $221.52.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 69, the high Power Rating of 83 contributes to an Value Trend Rating of A.
Encore Wire’s current Price Target is $467 (-17% from the 2023 Target of $563 but +111% from the 03/06/24 price of $221.52). This slight fall in the Target is the result of a +20% increase in the equity base and a -31% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
PTR’s return on equity forecast is 12.3% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is significantly below the 2022 peak of 32%.
PTR’s growth forecast is 24.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2015 and 2023. The current forecast is significantly above the 2017 low of 6%.
PTR’s cost of equity forecast is 9.0% — below recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2015 and 2023. The current forecast is above the 2015 low of 4.4%.
At Encore Wire’s current price of $221.52, investors are placing a negative value of $-188 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 30.0% per year, and a return on equity of 20.8% versus a cost of equity of 13.6%.
PTR’s 2025 Price Target of $467 is based on these forecasts and reflects an estimated value of existing assets of $215 and a value of future investments of $252.
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