Encore Wire Stock: Copper Prices Remain Elevated Despite Fed Efforts – Seeking Alpha | Jewelry Dukan

Simone N

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Encore Wire Corporation (NASDAQ:WIRE) has long growth prospects given robust demand in data centers, electric vehicles and green energy. The global data center industry is expected to grow by USD 615.96 billion 2026 with an impressive CAGR of 21.98%, with 35% attributable to the North American market. additionally US electric vehicle market is projected to grow tremendously from $28.04 billion in 2021 to $137.4 billion in 2028 at a CAGR of 25.4%, with the US renewable energy market expected to continue growing 826 billion kWh Generation in 2021 to 1170 billion kWh in 2027 at a CAGR of 6%.

Combined with WIRE’s increased inventories of $121.42M in Q2 2022, up 4.3% QoQ and 38.1% YoY, we actually expect improved sales as demand continues to outpace supply exceeds.

While there are some concerns about the drastic decline in copper prices to date, we must also remind investors that current levels still represent a notable rise of over 25% from pre-pandemic levels. This will further contribute to WIRE’s improved financial performance over the next few quarters during bear markets, if not years, once the macro economy improves through 2024, leading to a potential bull market between 2009 and 2019.

WIRE is on course for success after the reopening of Cadence

WIRE Sales, Net Income, Net Income Margin and Gross Margin

S&P Capital IQ

Last Twelve Months (LTM), WIRE reported outstanding revenue of $2.96 billion despite rising inflation and global supply chain issues. This has directly contributed to its improved profitability, with net income of $0.68 billion and a net income margin of 23 at the same time, 2%, up 25.9% or 2.3 percentage points year-on-year.

WIRE cash/equivalents, FCF and FCF margins

S&P Capital IQ

As such, we are not surprised by WIRE’s improved Free Cash Flow (“FCF”) generation with an FCF of $0.48 billion and a FCF Margin of 16.4% in the LTM, representing excellent increases of 62.4% and 20.4%, respectively 4.8 percentage points year-on-year. With continued investment in its business and 1.1 million shares repurchased through H1 2022, the company continues to report solid cash and cash equivalents of $0.46 billion in its most recent quarter. This shows its massive liquidity despite the deteriorating macroeconomic situation and its zero reliance on debt.

WIRE Net PSA and Capex

S&P Capital IQ

WIRE management also took the opportunity to reinvest in the company with increased capital expenditures of $134.7 million to achieve net PPE assets of $0.56 billion in the LTM. Also, total investments of $170 million are planned for fiscal 2022, up 43.7% year-on-year, with an additional $170 million planned for 2023 and $100 million for 2024. This will further expand the Company’s production capacity and output, which will prove to be peak and bottom line positive as copper prices remain elevated from pre-pandemic levels.

copper prices

copper prices

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On the other side of the world, there are reports of a 26% yoy increase in copper imports in China in August, possibly reflecting lower prices compared to the 2021 highs. However, we’re more optimistic as the country is expected to install a record high of 157 GW of green energy from wind turbines and solar panels in 2022, a notable 25% increase from last year’s record. In addition, a total of 1,200 GW of wind and solar installations are planned in China by the end of the decade. Fun Fact: The US government planned 207 GW of solar power and 73.4 GW of wind power over the next five years.

Given that China is the largest copper importer, supplying 60.7% of global demand in 2021, with the first eight months of 2022 already showing an 8.1% yoy increase, we expect the current Copper prices will hold up a little longer. This contributes to the sustainable development of WIRE.

WIRE’s basic performance remains intact for now

WIRE Projected Sales and Net Income

S&P Capital IQ

In the next two years, WIRE is expected to report an adj. revenue and an adj. Net income growth at a CAGR of 18.80% and 50.90% between FY2019 and FY2023, respectively. It is evident that consensus estimates are very bullish on future execution given the 4.6% improvement in net income margins in FY2019 , 20.9% in FY2021 and finally at 11.88% in FY2023.

Meanwhile, WIRE is expected to report fiscal 2022 revenue of $2.89 billion and net income of $606.8 million, showing outstanding growth of 11.54% and 11.54%, respectively, despite the tougher year-over-year comparison. represents 12.07% year-on-year. With projected net profit margins of 20.98% in fiscal 2022, it’s unlikely that we’ll see stock valuations fall sharply to pre-pandemic levels. For the third quarter of 2022, analysts are forecasting revenue of $0.69 billion and earnings per share of $6.82, down -3.24% and -19.92% year-on-year, respectively. However, it’s important to note that this decline is solely due to lower copper prices and not the company’s fundamental performance.

Recently raised solar tariffs, $369 billion in planned government spending on climate and energy initiatives, and the reintroduction of car tax credits from 2023 will also boost consumer demand for the US market. Combined with elevated oil/gas prices due to the deteriorating geopolitical situation and the approaching winter, we expect WIRE to report excellent growth indeed.

So, is WIRE stock a buy?Sell ​​or hold?

WIRE 5Y EV/Sales and P/E ratings

WIRE 5Y EV/Sales and P/E ratings

S&P Capital IQ

WIRE is currently trading at 0.70x EV/NTM Sales and 5.61x NTM P/E, which is relatively in line with the 5-year EV/Sales mean of 0.75x, but below its elevated 5-year -P/E average of 15.27x. The stock is also trading at $118.85, down -21.6% from its 52-week high of $151.65, albeit at a 44.9% premium from its 52-week low from $82.

WIRE 5Y stock price

WIRE 5Y stock price

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WIRE Dividend Payout & Yield

WIRE Dividend Payout & Yield

S&P Capital IQ

In the meantime, investors looking for attractive dividend payouts should look elsewhere, as WIRE management has maintained its prior quarterly dividend payout of $0.02 over the past two years despite massive growth in its profitability. We’re less concerned, however, as the stock is likely to be an outperformer over the next decade as the world continues on its rhythm of digital transformation after reopening.

Consensus estimates on WIRE’s prospects also remain bullish given the price target of $190.00 and a 59.87% increase from current prices. Therefore, those who missed the recent July bottom could add more on the next $100 drop, speculatively around early October 2022. The stock will continue to fall slightly over the next two weeks since August 2022 CPI of 8.3% is likely to trigger a 75 basis point hike at the upcoming Sept. 20 Fed meeting. That would result in an increasingly bearish stock market as the S&P 500 Index would already have fallen -17.73% year-to-date at press time.

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