Encore Wire Corporation
(WIRE - Free Report
) is in one tough industry: manufacturing copper wire. Construction continues to be in a severe recession but Encore is still expected to grow earnings by an impressive 160% in 2011.
This Zacks #1 Rank (strong buy) also just surprised on the Zacks Consensus Estimate by 130%. How is it doing it? It's all about the copper spread.
Encore Wire manufactures a range of copper electrical wire for interior wiring in homes, apartments, manufactured housing and commercial and industrial buildings.
Non-residential makes up 80% of its revenue, which has helped the company weather the housing bust as residential volumes have been a drag in recent years and are only recently showing signs of improvement.
Earnings Are About the "Spread"
On Apr 27, Encore reported its first quarter results and reported that the "spread" between the average price of wire sold per copper pound and the company's average cost of raw copper per pound rose 42.2% compared to the first quarter of last year. The spread also increased 14.3% from the fourth quarter of 2010.
Unit volume shipped also improved by 28.9% compared to the first quarter of 2010 and rose 5.3% from the fourth quarter of 2010.
Encore Surprised By 26 Cents in Q1
With the rising spread, Encore was able to blow past the Zacks Consensus. Earnings per share were 46 cents compared to the consensus of 20 cents. The company had a loss of 11 cents per share in the year ago quarter.
The company has surprised 3 out of the last 4 quarters after a string of misses throughout 2009.
Sales soared 73.2% on the spread and volume increase to $303.4 million from $175.2 million a year ago.
Cash Is King
Encore is one of those rare companies with absolutely no debt. It has no long term debt and its revolving credit line has been paid down to zero.
The company has cash on hand of $75.2 million as of Mar 31.
Its using some of its cash to reward shareholders. It pays a dividend yielding 0.3%.
Zacks Consensus Estimates Rise
Encore didn't provide guidance for Q2 or the full year other than saying it believes it has a competitive position in the industry. One of its competitors threw in the towel in the first quarter of 2010 so that helped margins industrywide.
Analysts are bullish on the 2011 outlook for the company as construction is bound to improve throughout the year, even if slowly.
The 2011 Zacks Consensus Estimate shot up to $1.72 from $1.29 per share after the Q1 report. The company made just 66 cents last year.
Even the 2012 estimate is rising, jumping 14 cents to $1.96 per share in the last 30 days.
Encore isn't an expensive stock. Shares are trading at just 14x forward estimates, which is under the 15x cut-off I use to find "value" stocks.
It also has a price-to-book ratio of only 1.3, also within the value territory of under 3.0.
Rounding out the valuation picture, the company has a price-to-sales (P/S) ratio of just 0.5. A P/S ratio under 1.0 usually designates value.
Shares Below 5-Year High
Not surprisingly, shares haven't recovered to 2007 highs, when the construction industry was booming, although they are off the 2009 lows.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the Turnaround Trader service. You can follow her at twitter.com/traceyryniec.