Encore Wire (WIRE)

Encore Wire (WIRE)

Is Encore Wire stock a good buy?

In this article, we review Encore Wire stock to determine if it’s a good buy, sell, or hold.

Encore Wire manufactures and sells electrical wires for a wide variety of industries. The company was founded in 1989, has about 1,000 employees, and is headquartered in McKinney, TX.

Tykr Rating

  • Summary: Watch
  • Score: 19/20
  • MOS: 41%
  • Share Price: $106
  • Sticker Price: $180

Encore Wire Company History

  • In 1989 they opened a 68,000 square foot industrial warehouse.
  • In 1992 they went public on the NASDAQ at $2.74/share.
  • In 1994 they added a second plant.
  • In 1997 they opened a distribution center.
  • In 1998 they added a copper rod mill.
  • In 1999 they added a plastic mill.
  • In 2001 they added a third plant.
  • In 2004 they expanded their distribution center to 420,000 square feet with 60 dock doors and a railroad track system.
  • In 2006 they added their fourth plant.
  • In 2007 they built a new corporate headquarters.
  • In 2008 they added their fifth plant.
  • In 2010 they opened Encore TechLab which is a research and development facility where Encore can create new environmentally friendly products.
  • In 2012 they added their sixth plant and introduced aluminum wire to its product line.
  • In 2014 they expanded their aluminum plant to 452,000 square feet.
  • In 2021 they built a new 720,000 square foot service center.

Encore Wire Business Model

The company manufacturers wires and cables for the following industries.

  • Healthcare
  • Data centers
  • Airports
  • Military bases
  • Oil and gas
  • Transit
  • Wastewater treatment
  • Schools
  • Power plants
  • Housing

Encore wire primarily sells through contractors and supply distributors. Here are three testimonial videos from mid to large contractors and supply companies. Delivery speeds and customer service are highlighted as the reason why companies do business with Encore.

Encore Wire also has an in-house copper recycling program which is important for keeping up with copper demands. We’ll touch on why in the news section below.

Encore Wire News

This article from zacks.com lists 4 relatively unknown companies with high net profits that should be considered as additions to diversified portfolios. 

  • Louisiana-Pacific (Watch, Score 15/20, MOS 36%)
  • PDC Energy (On Sale, Score 13/20, MOS 80%)
  • CONSOL Energy (Watch, Score 14/20, MOS 1%)
  • Encore Wire (Watch, Score 19/20, MOS 41%)

This article from gurufocus.com lists Encore Wire as a strong stock due to $0 debt, increasing EPS, and its dividend. It’s important to call out that the EPS growth rate over the last 5 years is 74% which is very healthy.

This article from businesswire.com provides some context on the demand of the global copper market. The global copper wire and cable market was valued at $156B in 2020 and is expected to reach $267B by 2030. The industries that will see the highest demand include power generation, power transmission, telecommunication, and electric circuitry. The key drivers behind the growth include the demand for more electricity, increasing commercial and residential construction, and the development of smart grids.

This article from forbes.com is titled “The Race for Copper, the Metal of the Future.” The article explains that the world needs more copper to support the demand for solar panels, wind turbines, and electric vehicles. We have an issue today where fewer and fewer copper mining locations are being discovered. Right now, Chile and Peru are responsible for 40% of the globe’s copper mining. Of the 224 copper mines discovered between 1990 and 2019, only 16 were discovered within the last 10 years. This is why copper recycling is becoming much more of a necessity for metal manufacturing companies.

Encore Wire Competition

There are a few competitors in this industry but they are mostly private companies including AFC Cable Systems, Cerro Wire, Carlisle Interconnect Technologies, General Cable, and Southwire.

Encore Wire 4M’s

MOS: The score of 19/20 shows the overall financials are impressive. In fact, if you take a closer look at the financial statements you can see the revenue went from $1.2B to $2.5B. The net income went from $76M to $541M. And the EPS went from 3.70 to 26.28. The stock is currently shown as Watch because the MOS is 41%. Although this number isn’t the 50% we prefer, this still shows some excellent upside potential.

Meaning: Knowing the demand for copper over the coming decade, Encore is in a great position to grow. It’s important to highlight the lack of copper mine discoveries but this can be a good thing as it will force Encore to double down on its recycling business. In fact, on their website they have an entire section focused on sustainability. If they are going to meet the demands of the power generation, power transmission, telecommunication, and electric industries, they need to source copper from recycled equipment. 

Moat: As noted, most of the competitors are private. Encore appears to be one of the largest companies in this industry with one of the strongest supply chain networks. As noted within some of the testimonial videos above, providing quality wire is one thing but the speed of delivery and customer service are more important. This is why Encore continuously wins contracts over the competition. When looking back at the company’s history, it’s important to highlight the investment and construction of large-scale distribution centers. Manufacturing is important but supply chain is the critical differentiator. 

Management: Daniel L. Jones has served as Chairman, President, and CEO since 2006. He joined Encore Wire in 1989 and served in positions including Vice President of Sales and Marketing, Executive Vice President, and COO. He has in-depth knowledge of operations and supply chain which is apparent through the company’s ability to capitalize on market share. Since 2006, the company has seen slow and steady growth until 2021 when the share price really started to take off. This is most likely due to external factors such as the demand of copper. It’s exciting to see the company’s strong emphasis on sustainability as that, aside from its supply chain strength, will continue to separate the company from the competition. 

Encore Wire Financials

Now let’s take a look at the financials to get us closer to determining if Encore Wire’s stock is a good buy. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

  • 2018:  $1.28B
  • 2019:  $1.27B
  • 2020:  $1.27B
  • 2021:  $2.59B
  • Revenue remained flat for a few years until 2021 when it took off. This is a great sign.

Net Income (Found on the Income Statement)

  • 2018:  $78M
  • 2019:  $58M
  • 2020:  $76M
  • 2021:  $541M
  • Net Income has significantly increased in 2021. In fact, this is one of the largest net income jumps I’ve seen in one year, from any company. Typically a manufacturing company isn’t going to see a profit increase of this magnitude. This is very impressive.

EPS (Found on the Income Statement)

  • 2018:  3.75
  • 2019:  2.78
  • 2020:  3.69
  • 2021:  26.28
  • Similar to the net income, the increase in 2021 was very impressive.

Free Cash Flow (Found on the Cash Flow Statement)

  • 2018:  $55M
  • 2019:  $53M
  • 2020:  -28M
  • 2021:  $300M
  • Free Cash Flow has significantly increased in 2021. Also very impressive.

Total Assets (Found on the Balance Sheet)

  • 2018:  $818M
  • 2019:  $883M
  • 2020:  $966M
  • 2021:  $1.5B
  • Total Assets have consistently increased. This is a great sign.

Total Liabilities (Found on the Balance Sheet)

  • 2018:  $97M
  • 2019:  $104M
  • 2020:  $128M
  • 2021:  $191M
  • The Total Liabilities have consistently increased. Ideally, we want to see liabilities decrease. Manufacturing companies can have high costs due to employees, buildings, and expensive equipment. In this circumstance, if we see the liabilities increase, this is okay.

Total Debt (Found on the Balance Sheet)

  • 2018:  $0
  • 2019:  $0
  • 2020:  $0
  • 2021:  $0
  • Very impressive! No debt. 

Equity (Found on the Balance Sheet)

  • 2018:  $720M
  • 2019:  $779M
  • 2020:  $837M
  • 2021:  $1.3B
  • The Total Equity has consistently increased which is a great sign.

The 4 M’s of this business look really good. Regarding the MOS, a 19/20 shows the financials are impressive. Although the MOS is 41%, there is still plenty of upside potential. Regarding the meaning, we know copper will be highly in demand over the next decade. The company will continue to grow as long as they maintain strong supply chain processes and grow its recycling division. Regarding the moat, they currently are the top competitor in this industry. To remain on top, they need to keep doing what they’ve been doing, delivering products quickly with best-of-class customer service. Regarding the management, Daniel L. Jones is doing a great job as CEO. The strong emphasis on supply chain, customer service, and sustainability will help this company grow over the coming decade.

As Forbes quoted “Copper, the Metal of the Future”. If you like investing in electronic equipment and vehicles, you might want to think about where the copper that goes into those products is sourced. Encore Wire is a stock you may want to add to your watchlist or portfolio.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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