Case Study
Encore Wire Corporation
“Just because there’s tarnish on the copper, doesn’t mean there’s not a shine beneath.” – Laurence Yep
Buy Alert | 2/27/2024
As technology and processes improve, we are finding more and more uses for certain commodities (raw materials, i.e. copper, gold, water, etc.). And we are finding that known commodities have more value than we appreciated previously. This report recommends a company that is directly involved in one of those commodities, copper. Encore Wire (WIRE) was incorporated in McKinney, Texas in 1989. They manufacture a broad array of wires and cables which are used to transmit power. They only have 1 site for everything, giving them an operational advantage, to be discussed in the strengths section. They’ve positioned themselves to be a strong cash flowing business, with no debt, and huge tailwinds coming from future growth related to the massive infrastructure buildout that is happening across America (I’ll elaborate on this further down). They have vertically integrated the manufacturing process by controlling the process from scrap copper all the way to the finished product, keeping costs down and efficiencies up. The CEO/Chairman/President, Daniel Jones, is a long-time employee, and has been with the company since its 1989 inception.
As you can imagine, the growth and market share that this company can go after is massive. Of course, they have competitors, but it’s always good to have the wind at your back for future growth and opportunities. Some fun facts about copper courtesy of the Copper Development Association:
The average electric car has 165 pounds of copper in it.
A forklift has about 138 pounds of copper.
A Boeing 747 has about 9,000 pounds of copper.
The latest model locomotive has 16,000 pounds of copper.
A nuclear submarine has 200,000 pounds of copper.
A 2,100 square foot home has 439 pounds of copper.
Datacenters use 54,000 pounds of copper per megawatt of applied power.
Below are the type of wires that Encore Wire manufactures.
Business + Strengths
So, let’s get down to it. I already mentioned in the introduction that they’re in the copper wire business, but they also are involved in some aluminum sales. Since the vast majority of sales come from copper, that’s what we will discuss. Their business is manufacturing and distributing of copper wires. Copper is important because aside from silver, it’s the best conductor of electricity. Their customers are wholesale electrical distributors, who then sell the products to pretty much every industry you can think of. To narrow the list, I’ll name the more major ones that they do business with to include: clean energy, data centers, healthcare, transit, military bases, power generation, oil and gas, wastewater treatment, airport expansion, and commercial construction. Massive industries that require millions of tons of copper wire. Now for those that follow the news, there has been a major infrastructure act passed which authorized over a $1.2 trillion to be spent on U.S. infrastructure (and to be realistic, there will continue to be infrastructure funding until the end of time). The photo below shows the categories of spending for the infrastructure act. Please note the amounts might not be the end exact numbers, but note the categories. See any correlation? Let me know when the light bulb goes off.
These spending categories prioritize customers for copper wire!
It’s pretty easy to see how copper wire is going to be pivotal in the future. Let’s discuss what makes them stand out specifically as compared to other companies. For starters, they have a 1 campus location. Their entire operation from HQ to recycling to manufacturing is located in McKinney, Texas. Even though it seems pretty straight forward, the process to make copper wire has many steps; casting, drawing, stranding, compounding, insulating, cabling, jacketing, and armoring. By integrating these various stages of their company in 1 location, they reduce costs, improve efficiency, have more control over quality, and streamline operations.
They have less exposure to bottlenecks, causing a likelihood in potential interruptions. For example, a few years back, the Suez Canal was blocked, causing massive shipping issues. Any company that had several different locations to manufacture and relied on shipping had huge delays because of this. Being in 1 location in the middle of the U.S. helps avoid that. They can also receive and send out orders faster than competitors. This speed of filling orders keeps their customers satisfied.
Leadership can also see problems and implement solutions quicker. Communication between various portions of the business is faster. They don’t have to pay for shipping between plants. They have this benefit because they have continuously built onto their existing site rather than purchase other copper companies and integrate into their existing business. If that were the case, their operations might be scattered over many different locations.
Hold Alert | 5/4/2024
Encore Wire Corporation (WIRE) Original Buy Price: $235.00 or LESS
We are still holding WIRE since our buy alert on FEB 27, 2024. WIRE had good news all around. Copper volume shipped was up nearly 20% year over year, and this led to stronger sales. There was also a huge stock increase that was caused by Prysmian, an Italian company, offering to acquire the entire company for $290 a share. What are the implications of this? Companies can buy out entire companies, and they do this by acquiring the shares outstanding. If they are offering $290 per share, why are the shares not reflecting that price? There is always the risk that the acquisition will not go through for one reason or another, and this holds the stock back slightly from the offer price. WIRE has been given a “go shop period” that ends MAY 19, 2024. This is where WIRE can get someone else to buy their company for a higher price within that time period, which could start a bidding war.
If WIRE does go with another offer, they would owe Prysmian a contract termination fee of $146.54 million. Personally, I think the price that Prysmian offered is too low. WIRE is in a really great position to benefit in the future from copper demand. I look at the whole situation as a win-win-win. If Prysmian buys it at $290 a share, then shareholders who bought when we sent the report get a 26% in about 4 months. If someone else buys, presumably at a higher price, then that return will of course increase. If WIRE decides to not sell, they will owe the termination fee and shares will drop a bit, but in the long term I do think the shares will continue their march upwards as earnings increase.
If you own the shares when the acquisition is complete, they will automatically sell and turn to cash in your brokerage account.
Sell Alert | 5/28/2024
I’m recommending to sell Encore Wire Corporation (WIRE). WIRE was originally alerted on FEB 27, 2024 when it was trading at $229.23. As of this sell report it is priced at $277.19.
Return Comparison
If you bought WIRE when we alerted and sell when this alert was sent, you will have made a return of 20.19 % in 3 months, compared to the S&P 500 return of 4.47 %, or a positive delta of 16.46 %.
Why Are We Selling?
It was announced that WIRE will be acquired by Prysmian, an Italian company, for $290 a share. The deal had a period where WIRE could entertain other offers but no other offers were presented. Now the “go shop” period is over. The transaction still has to be voted for and approved, but it has the board’s support and should go through. The reason the stock doesn’t trade currently at the offer price of $290 is to account for the fact that there is a chance the transaction does not take place. The sale is supposed to take place in the 2nd half of 2024. Considering that the spread from where the price is now to the end sale price is only about $10, it would be better to sell now and reinvest the gain elsewhere, rather than wait for potentially half a year for a 4% ROI.