Wednesday, December 31, 1997

Encore Wire Corp.
Nasdaq: WIRE)
Phone: 972-562-9473
Price (12/30/97): $30 3/16


HOW DID IT DOUBLE?

The story of copper wire maker Encore Wire is a story of growth, plain and simple. The company had sales of $10.7 million in 1990, while today trailing 12-month sales are running at over $240 million. The company's share of the residential copper wire market has grown from 2% in 1994 to 12% at the end of the last fiscal year.

This success has been accompanied by a major improvement in operating margins over the past two years. In 1995 operating margins were 7.2%, in 1996 they rose to 14.3%, and in the first 9 months of the current fiscal year they are running at 20.2%.

Top off this performance with earnings that have handily bested estimates over the past three quarters and you have all it takes to make a Double.

BUSINESS DESCRIPTION

Encore Wire makes copper wire for residential and commercial construction. Recently the company announced plans to build a facility to make copper rods, the raw material from which wire is made.

Encore has a state of the art manufacturing facility that has cut down on the number of times the wire must be handled during manufacturing. Employees have performance incentives that have inspired greater productivity as well. The company is focused on rapid delivery and excellent customer service. Both manufacturing and marketing efficiencies have helped the company boost market share.

Principal competitors are Southwire Corp., Essex Corp., and General Cable Corp.

FINANCIAL FACTS

Income Statement
12-month sales: $241 million
12-month income: $18.9 million
12-month EPS: $1.72
Profit Margin: 7.8%
Market Cap: $334.5 million

Balance Sheet
Cash: $1.1 million
Current Assets: $79.7 million
Current Liabilities: $30.2 million
Long-term Debt: $24.9 million

Ratios
Price-to-earnings: 17.6
Price-to-sales: 1.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Encore Wire has been on a roll. It doubled between the fall of 1996 and the spring of 1997 and has doubled again since. The stock would have been a regular on the new highs list. In addition, Encore's regular besting of earnings estimates would have placed in on the list of companies outpacing analysts' expectations.

Once an investor had taken notice of the company, a review of the March 1997 10-K would have been all that was needed to see the potential for the stock. The company's efforts to improve efficiency and the improving margins were outlined in that report. In addition, last spring the building sector was beginning to make its move up the relative strength charts. One way to participate in a building boom is to concentrate on suppliers of building products.

WHERE TO FROM HERE?

After doubling twice in the past 18 months, it would not be surprising to find that Encore Wire is a bit overvalued. However, in Encore's case its earnings have been keeping pace with the stock price and the multiples don't look all that bad. The current trailing PE is 16, and the company is trading at only 10 times 1998 earnings estimates. The price-to-sales ratio of 1.2 is above historic levels for the stock, but so are its margins.

Using my handy PEGulator I come up with a PEG of 0.38, which implies that the stock has plenty of upside using that valuation measure. However, the PEG can be misleading when used to value cyclical companies. A YPEG based on estimates of 14% growth going forward is $35, still well above current price.

So, what could go wrong? The copper wire business is cyclical, as it is dependent on the very cyclical building industry. Encore has tried to shield itself from the cyclical nature of the building business by focusing its sales efforts on remodeling contractors. In addition, the company only recently entered the commercial wire business and its market share there has plenty of room to grow.

The key to Encore Wire's growth is gaining market share, as it has pushed margin improvement about as far as can be expected. If market share gains continue and earnings continue to meet or exceed analysts' expectations, then Encore Wire may have another encore as a double.

-Mark Weaver, MD
(MWEAV@aol.com)


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