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This article is part of our Rising Star Portfolios Series.
In a world that grows more wireless by the second, it's ironic but true: We still need wires. Sure, our smartphones, laptops, and the Internet all come sans cables these days, but it all has to start somewhere. And Houston Wire and Cable Company (Nasdaq: HWCC ) is there to make sure it all gets connected.
Houston, we have profits
Founded in 1975, Houston Wire and Cable Company is one of the largest distributors of specialty electrical wire and cable, and related services in the country. The company serves a valuable role between wire and cable manufacturers and its customers in the utility, infrastructure, and industrial segments, and I think it is just a matter of time until the market catches onto the potential this company really has.
With a nationwide distribution network ready to deliver the goods at a moment's notice, Houston Wire does more than just distribute wire and cable. Value-added services including free custom cuts, application engineering, and cable management services -- not to mention "24/7/365 service" -- put the company in a league of its own. This level of service, along with the company's inventory depth and national distribution network, help Houston Wire maintain its role in this value chain.
While the lethargic economy continues to weigh on demand for the company's services today, it is only delaying the inevitable upgrades and requisite work that needs to be done to catch our country up with the 21st century. In fact, management sees a potential $200 billion-plus opportunity in its target segments, with the bulk of that coming from the industrial market. From wastewater and mass transit to energy and steel and everything in between, Houston Wire's services will be called on in some capacity, and we'll be a part of it when they are.
Houston Wire also produces its own private-branded products that offer a significant market opportunity, as well. Specifically, the company sees a potential $1.4 billion market for its LifeGuard low-smoke, zero-halogen cable. LifeGuard is designed for a high degree of safety and protection and is used in many commercial, industrial, and utility applications. Other proprietary products include DataGuard cable for data and communications and Houwire, designed specifically for the sound, security, and fire alarm markets.
While Houston Wire may be small, it has a reputation for excellence in its field. In 2009, the company served approximately 3,000 customers, including most of the top electrical distributors in the country. Company metrics for on-time shipments and order accuracy are as close to perfect as an Augusta National putting green, and with 12-year veteran CEO Charles Sorrentino at the helm, I see no reason for this to stop. The fact that insiders own about 9% of the shares outstanding ensures that they have some skin in this game, too.
Houston, do we have a problem?
Houston Wire is still a small cap, a very small cap. With a market cap of just more than $200 million, it barely makes the cut for me to add it to the portfolio. And while it continues to grow organically, this is a very fragmented industry, and acquisitions are also part of its growth strategy. Over the summer, Houston Wire acquired smaller competitors Southwest Wire Rope and Southern Wire.
Part of the investment thesis here is most certainly based on the eventual demand to come around for infrastructure, utility and industrial upgrades, and construction. While I have no visions of the economy turning a corner tomorrow, any extended economic malaise or even (gulp) a double-dip could have me rethinking this one. Competition from larger companies like Ingram Micro (NYSE: IM ) and WESCO International (NYSE: WCC ) is something to keep in mind, but again, it is Houston Wire's specialized products and services that help separate it from the rest.
It could be worth more
Houston Wire's $12 price tag is not what I would call a "screaming" value, but I don't see it as being expensive, either. I think today's price is a relatively fair one when looking at the short term. However, it implies a little bit less than 5% annual free cash flow growth over the next 10 years using a discount rate of 12%. While over the short term that may seem reasonable, I think the long-term prospects for this company look better, and I plan on holding the stock for a long time.
You light up my life
This is my second buy this month and the second small cap added to my portfolio. Just like with the first, I am giving Houston Wire a 3% position on my way to a nice collection of small caps to call my own. Patience is a virtue, and this goes double when it comes to investing Foolishly. So while I don't expect any shocking news anytime soon, I do expect to see Houston Wire helping light up my portfolio years from now. Agree? Don't agree? Swing on by my discussion board and let's talk about it. You can also follow me on Twitter. Here's to the future!
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