WIRE Is The Missing Element (NASDAQ: WIRE)
WIRE ATKR KMI ET ROKU OXY LNG CRWD PLTR XOM SWN CRK CHK FCX BHP
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This week’s report will be back to the usual program, energy transmission. Today we will be looking at Encore Wire Corporation (NASDAQ: WIRE), a company that specializes in manufacturing electrical wire and cables for power distribution from grid to wall outlets. This company was requested a few months back in response to my report covering Atkore (NYSE: ATKR).
This week posed some interesting challenges to the market theme for the year. Every analyst and their dog anticipated a strong shift in monetary policy (except me, of course) as inflationary pressures wane and the regional banking and commercial real estate sectors feel the pressure of high interest rates. As reported on February 13, 2024, the annual inflation rate in the US fell back to 3.1%, a 30bps increase to the previous month with core inflation holding steady at 3.9%, a 40bps increase from the previous month. Analyst forecasts pitched inflation growth at 2.9%, a slight miss to the disinflation story.
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Market & Equity Update
The markets reacted strongly after the news with the S&P 500 dropping -2% intraday before recovering to a -1.37% pull. The NASDAQ fell a further -2.44% intraday before settling at a -1.80% loss.
Some notable events occurred in the last week or so that may bring near-term headwinds to a few of the companies I follow. Specifically, the recent pause on approving new LNG export facilities has somewhat created a significant concern for domestic gas producers. Though I anticipate this was purely a political stunt during an election year, this could have potentially negative effects to gas producers’ growth strategy in the Haynesville/Bossier Basin. To a lesser extent, this could potentially impact gas midstream services coming out of the basin and transport to the Gulf Coast. Names like Energy Transfer (NYSE: ET) and Kinder Morgan (NYSE: KMI) may be impacted in terms of longer-term growth strategy for gas export & transport.
Roku (NASDAQ: ROKU) took a beating in afterhours as the firm experienced strong hours watched but declining ARPU. Shares slid by -17% following the earnings release despite the exceptionally strong revenue beat and narrower net loss. My original thesis still stands in which the firm may face a more challenging environment as they navigate adding their own line of TVs to the mix. In more recent news, Walmart announced the potential acquisition of Visio, which may be why Roku shares are being pressured.
Occidental Petroleum (NYSE: OXY) reported a beat in q4’23 earnings on February 14, 2024, with daily production at 1,234Mboe/d, exceeding the midpoint guidance of 8Mboe/d. The firm’s guidance called for a shift in long-/short-cycled production, as I had discussed in previous reports, by trimming capital investments in shale and beefing up investments in the Gulf of Mexico, chemicals, and enhanced oil recovery (CO2).
Energy Transfer (NYSE: ET) reported a miss at the top line by -$970mm with strong growth in distributable cash flow. DCF reached $2.03b, up by 6% from the previous year. The firm forecasted aEBITDA in the range of $14.5-14.8b with the midpoint being a 7% increase from aEBITDA in FY23. Units rose 2.20% in the following day of trading.
Notable News Stories
JPMorgan Chase, Wells Fargo cut overdraft revenue to $2 billion in 2023 (cnbc.com)
Exclusive: Germany to slash 2024 economic growth forecast to 0.2%, source says | Reuters
Fed seen waiting longer to cut rates as inflation stays elevated | Reuters
Real estate pain for US regional banks is piling up, say investors | Reuters
Oil prices today: WTI, Brent rise as U.S. production plateaus (cnbc.com)
German industrial output falls more than expected in December | Reuters
Regional-bank stocks pressured as investors get 'dose of reality' over rate cuts - MarketWatch
Power Transmission Encore Wire (NASDAQ: WIRE)
Turning to Encore Wire Corp. (NASDAQ: WIRE), given the necessary transformation and modernization of the grid, this company may be in a perfect position take full advantage of the ever expansive infrastructure. As much of a fossil fuels supporter as I am, it is only rational to realize that electrification is occurring. With China bulldozing into electrification with 217GW of new solar capacity and 76GW of new wind capacity coming online in 2023, it is only a matter of time before the US beefs up its chest and further pushes into the market. Not only will the grid require a significant facelift in new infrastructure to support intermittent power generation, but the addition of the US pushing to nearsource/insource industrials, manufacturing, and semiconductor manufacturing will require a significant buildout in capacity to accommodate power needs.
Though the IRA and Infrastructure Bill have yet to be impactful, I remain hopeful; it is an election year, after all. It’s time for the administration to put its (rather, our) money where its mouth is. Will these two multi-billion-dollar pieces of legislature be worth their weight in salt or will they remain as lengthy articles that have all talk and no bite?
Copper is the primary input for Encore Wire, accounting for 70% of total cost of goods sold at 44% of revenue in FY22. Arguably, copper pricing is rather sensitive to interest rates and has experienced a 30bps decline since the CPI print on February 13, 2024. Comparing a few of the copper mining firms to the price of copper, we can visually see the cyclicality and modest decline into 2024.
Encore Wire’s margins are rather sensitive to the overall commodity pricing scheme as their end product, copper wire, is viewed as a commodity in its own respects and experiences price fluctuations that oftentimes overshoot the price of copper. For example, in q4’23, copper prices declined by -1.2%, resulting in a -3.2% decline in copper wire prices. Though this price decline was modestly offset by exceptional volumes growth, the price continued to take its toll on Encore Wire’s operations.
Looking at the futures market to add some color into the picture, the 30bps decline placed US Comex copper futures prices at $3.70/lb, as reported by Reuters on February 14, 2024. July 2024 futures contracts price copper at $3.74/lb, significantly above July 2023 prices at ~$3.55/lb. March contracts reached a high of $3.7255/lb before settling at $3.70/lb, a modest decline.
This may be setting up Encore Wire for another quarter of headwinds as the firm expands operations and brings their XLPE expansion up to capacity.
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