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Bull of the Day: Encore Wire Corp (WIRE)

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Encore Wire Corp (WIRE - Free Report) , a Zacks Rank #1 (Strong Buy) is a low-cost manufacturer of copper electrical building wire and cable. The Company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings.

Recent Earnings Data

The company reported Q4, and FY 2017 results on February 20th where they beat the Zacks consensus earnings and revenue estimates for the second consecutive quarter.  On a year over year basis, earnings grew by +38.2% while revenues rose by +25.9%.  There were several reasons for the impressive results; an increase in unit volumes (measured in copper pounds contained in wire sold) by +5.8%, a +22.8% rise in average selling price per copper pound, and a +30.1% increase in sales prices.  Moreover, the company’s gross margins improved more than previously expected.  

Management’s Take

According to Daniel L. Jones, Chairman, President, and CEO, “We are pleased to report a great fourth quarter and full year. Our unit sales were up in both copper and aluminum building wire for the year. One of the key metrics to our earnings is the spread between the price of copper wire sold and the cost of raw copper purchased in any given period. The copper wire spread increased 9.9% in 2017 versus 2016, as the average price of copper purchased increased 25.4% in 2017 versus 2016, and the average selling price of wire sold increased 19.8%. We are also encouraged by the fact spreads improved during the fourth quarter of 2017 versus the third quarter of 2017.”  Mr. Jones continued, “Our balance sheet is very strong. We have no long-term debt, and our revolving line of credit is paid down to zero. In addition, we had $123.4 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.”

Looking Forward

The company is expected to see significant tax savings due to the new corporate tax rates; WIRE will see its effective tax rate fall from about 33% to approximately 22%.  Also, the continued positive housing and permit data shows that the need for electric wiring will remain in place though 2018.  

Price and Earnings Consensus Graph

Due to the strong 2017, lower tax rate going forward, and the elevated housing situation, the stock price and future earnings estimates have moved upwards.

Encore Wire Corporation Price and Consensus

Encore Wire Corporation Price and Consensus | Encore Wire Corporation Quote

Increasing Earnings Estimates

Over the past 7 days, earnings estimates for Q1 18, Q2 18, FY 18 and FY 19 have all been positively revised; Q1 18 improved from $0.51 to $0.69, Q2 18 rose from $0.58 to $0.75, FY 18 was lifted from $2.11 to $2.97, and FY 19 advanced from $2.50 to $3.25.   

Bottom Line

The need for electric wiring in both residential and commercial buildings remains strong due to the continuing increase in new building permits, and new construction projects.  Further, the 11% decline in its effective tax rate will act as another tailwind for the company beyond 2018.  While this industry is cyclical, it is not showing any signs of slowing down.  So 2018 is looking to be another strong year for WIRE.

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