BUSINESS
Insteel Industries, Inc., together with its subsidiaries, manufactures and markets steel wire reinforcing products for concrete construction applications. The company offers prestressed concrete strand (PC strand) and welded wire reinforcement (WWR) products. Its PC strand is a seven-wire strand that is used to impart compression forces into precast concrete elements and structures providing reinforcement for bridges, parking decks, buildings, and other concrete structures. The company’s WWR engineered reinforcing product is used in nonresidential and residential construction.
INVESTMENT RATING
With future capital returns forecasted to be above the cost of capital, IIIN is expected to continue to be an important Value Builder.
Insteel Industries has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Insteel Industries has a neutral Appreciation Score of 55 but a good Power Rating of 83, resulting in the Positive Value Trend Rating.
Insteel Industries’ stock is selling below targeted value. The current stock price of $35.28 compares to targeted value 12 months forward of $42.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
Insteel Industries has a Power Rating of 83. (IIIN’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.)
Factors contributing to this good Power Rating include: the Steel Work, Roll & Finish Mill comparison group is in a strong phase currently; recent price action has been favorable; and earnings estimate behavior for IIIN has been slightly favorable recently.
INVESTMENT PROFILE
IIIN’s financial strength is average. Financial strength rating is 55.
Relative to the S&P 500 Composite, Insteel Industries Inc has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that IIIN is normal risk. Low financial leverage is a positive for IIIN. Relative weaknesses include: low forecasted profitability, low financial strength, low historical growth, and high earnings variability. IIIN’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. IIIN has unusually low market capitalization.
CURRENT SIGNALS
Insteel Industries’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.
Insteel Industries’ current technical position is very strong. The stock price is in a 1.6 month up move. The stock has appreciated 43.0% 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 B.
Insteel Industries Inc (NYSE: IIIN) stock declined modestly by -1.6% on 3/18/24. The stock closed at $35.28. However, trading volume in this decline was below average at 79% of normal. The stock has been strong relative to the market over the last nine months but has declined -1.1% during the last week.
CASH FLOW
In 2023, Insteel Industries generated a very significant increase in cash of +$77.35 million (+160%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$48.02 million. Non-operating sources contributed +$7.13 million (+15% of EBITDA). Cash taxes consumed -$8.88 million (-18% of EBITDA). Withdrawal of investment from the business totaled +$71.47 million (+149% of EBITDA). On a net basis, debt investors furnished +$0.28 million (+1% of EBITDA) while equity investors pulled out -$40.65 million (-85% of EBITDA).
Insteel Industries’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Insteel Industries Peer Group as well. (Since 2021 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Insteel Industries was in the top quartile. Currently, Insteel Industries is upper quartile at +15% of EBITDA (+$7.13 million).
Insteel Industries’ Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Insteel Industries Peer Group. In most years, Insteel Industries was in the second quartile and top quartile. Currently, Insteel Industries is at median at -18% of EBITDA (-$8.88 million).
Insteel Industries’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Insteel Industries Peer Group. In most years, Insteel Industries was in the top quartile and third quartile. Currently, Insteel Industries is upper quartile at +149% of EBITDA (+$71.47 million).
Insteel Industries’ Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Insteel Industries Peer Group as well. In most years, Insteel Industries was in the second quartile and top quartile. Currently, Insteel Industries is above median at +1% of EBITDA (+$0.28 million).
Insteel Industries’ Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Insteel Industries Peer Group. In most years, Insteel Industries was in the top quartile and lower quartile. Currently, Insteel Industries is lower quartile at -85% of EBITDA (-$40.65 million).
Insteel Industries’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Insteel Industries Peer Group. In most years, Insteel Industries was in the top quartile and lower quartile. Currently, Insteel Industries is upper quartile at +161% of EBITDA (+$77.35 million).
Insteel Industries’ Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Insteel Industries Peer Group. In most years, Insteel Industries was in the top quartile and second quartile. Currently, Insteel Industries is at the upper quartile at +19%.
PROFITABILITY
Insteel Industries’ return on equity has been stable since 2014. The current level of 6.7% is 2.95X the low for the period and is -27.7% from the high.
This stability was due to little change in pretax operating return and little change in non-operating factors.
The productivity of Insteel Industries’ assets remained stable over the full period 2014-2023: asset turnover has exhibited little to no overall change.
Additionally, pretax margin has exhibited little to no overall change although it experienced a very sharp decline from the 2022 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
Insteel Industries’ return on equity is lower quartile (6.7%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is lower quartile (7.4%) reflecting asset turnover that is at the upper quartile (1.55X) and lower quartile pretax margin (4.8%).
Tax “keep” rate (income tax management) is at the upper quartile (77.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (1.17X).
GROWTH RATES
There are no significant differences between Insteel Industries’ longer term growth and growth in recent years.
Insteel Industries’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 5.3% per year.
Total asset growth has been 5.4% per year.
Annual E.P.S. growth has been 8.4% per year.
Equity growth has been 7.0% per year.
Insteel Industries’ consensus growth rate forecast (average of Wall Street analysts) is 12.0% — substantially above the average of the historical growth measures.
Relative to the Insteel Industries Peer Group, Insteel Industries’ historical growth measures are consistently third quartile. Revenue growth (5.3%) has been below median. E.P.S. growth (8.4%) has been slightly below median. Equity growth (7.0%) has been below median. Total asset growth (5.4%) has been at the lower quartile.
In contrast, consensus growth forecast (12.0%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Insteel Industries’ stock price performance has been variable and below market. Between May, 2013 and March, 2024, Insteel Industries’ stock price rose +97%; relative to the market, this was a -38% loss. Significant price moves during the period: 1) March, 2020 – April, 2022: +220%; 2) July, 2018 – May, 2019: -56%; and 3) September, 2015 – September, 2016: +125%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 30.9% is at the upper quartile relative to the S&P 500 Composite.
In addition to being at the upper quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of 30.9% is substantially above median relative to Insteel Industries Inc Peer Group.
Current 5-year total return performance of 15.9% is substantially above median relative to the S&P 500 Composite.
Through February, 2024, with substantially above median current 5-year total return of 15.9% relative to S&P 500 Composite, Insteel Industries’ total return performance is slightly above median relative to Insteel Industries Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, IIIN’s overall valuation is normal. The highest factor, the price/earnings ratio, is above median. Ratio of enterprise value/earnings before interest and taxes is above median. Ratio of enterprise value/assets is slightly above median. Price/equity ratio is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Insteel Industries Peer Group, IIIN’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is at the upper quartile. Ratio of enterprise value/revenue is above median. The lowest factor, the price/equity ratio, is slightly below median.
Insteel Industries has a large value gap compared to the median. For IIIN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.14X to 1.01X. If IIIN’s ratio of enterprise value/revenue were to fall to 1.01X, its stock price would be lower by $-4 to $31.
For IIIN to achieve upper quartile valuation relative to the Insteel Industries Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.14X to 1.33X. If IIIN’s ratio of enterprise value/revenue were to rise to 1.33X, its stock price would increase by $6 from the current level of $35.
VALUE TARGETS
With future capital returns forecasted to be above the cost of capital, IIIN is expected to continue to be an important Value Builder.
Insteel Industries’ current Price Target of $53 represents a +49% change from the current price of $35.28.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 55, the high Power Rating of 83 results in an Value Trend Rating of B.
Insteel Industries’ current Price Target is $53 (+1% from the 2023 Target of $52 and +49% from the 03/18/24 price of $35.28). This plateau in the Target is the result of a +7% increase in the equity base and a -5% decrease in the price/equity multiple. The forecasted decline in growth has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a large positive impact.
PTR’s return on equity forecast is 15.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly below the 2022 peak of 29%.
PTR’s growth forecast is 9.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is above the 2020 low of 4%.
PTR’s cost of equity forecast is 10.4% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is well below the 2022 peak of 16.0%.
At Insteel Industries’ current price of $35.28, investors are placing a positive value of $4 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 14.3% versus a cost of equity of 10.3%.
PTR’s 2025 Price Target of $53 is based on these forecasts and reflects an estimated value of existing assets of $41 and a value of future investments of $11.
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