International Wire Group Is Cheap, But Is It Safe? - ITWG
|Jan 27, 2013|
My series on investing strategy will continue next week. Until then, let's examine an aggressive manufacturing company, International Wire Group.
International Wire is the largest bare wire and copper wire products manufacturer in the United States with revenues of $870 million in 2011. International Wire is an aggressive acquirer. Beginning in the late 1990s, International Wire began acquiring numerous smaller companies and divisions in the US and Europe. Unfortunately, this acquisition spree lead to lead to excessive debt and the company was forced to seek bankruptcy protection in 2004.
International Wire Group shed hundreds of millions in debt in the bankruptcy process and emerged from bankruptcy in 2005. Since then, the company has been on a tear. From the beginning of 2005 to the end of the third quarter of the 2012, the company produced total net income of $84.5 million and free cash flow of $218 million. The company has used its staggering free cash flow to pay multiple large special dividends and repurchase stock, paying out nearly $250 million to shareholders since emerging from bankruptcy. (This $250 million is nearly 2.5 times the company's present market capitalization.
While it has been extremely successful and generous to its shareholders, International Wire has taken on more and more debt to fund distributions. Since hitting a low of $80.25 million in 2009, International Wire has tripled its debt to more than $250 million. In December, the company used $60 million to repurchase 3.67 million shares of its stock, fully 37.4% of diluted shares outstanding.
After the repurchase, International wire has about 6.37 million shares outstanding and trades with a bid/ask mid-point of $17.75 for a market capitalization of about $109 million. Trailing net income is $21.6 million for a trailing P/E of 5.0. Present net debt is around $270-$275 million, per estimates by Standard & Poor's. (Subsequent to quarter's end, the company issued $250 million in debt due 2017 at an 8.5% coupon and used the proceeds to redeem all previously outstanding term debt and fund the stock repurchase. The company is expected to have funded debt redemption beyond the limits of the new debt issue by drawing on its revolving credit facility. The company also is expected to have $10-$15 million in cash on hand at the end of 2012.) The company's enterprise value is about $379-$384 million, or about 5.0 times trailing EBITDA.
On current earnings and EBITDA, International Wire seems attractively valued. After all, a 20% earnings yield is nothing to scoff at. Net debt is worryingly high at 3.8 times EBITDA and 4.9 times operating income, but the interest payments are still easily covered. Unfortunately, International Wire Group operates in a cyclical industry and extrapolating current levels of revenue and income would be foolish. As recently as 2009, the company managed revenues of just $450 million and adjusted operating income of just $18.7 million. $18.7 million is not enough to cover the interest expense of the company's new $250 million debt issue. Should economic conditions take a multi-year turn for the worse, International Wire might quickly find itself in some trouble. Standard & Poor's apparently agrees, having assigned an extremely speculative rating of "B" to the company's new debt issue.
So why does International Wire Group choose such an aggressive capital structure policy? The reason may have something to do with Chairman of the Board Hugh Wilson. In addition to being chairman of International Wire, Mr. Wilson is a managing partner of Tennenbaum Partners, an investment company that focuses on debt financing for small and mid-tier companies. Tennenbaum Partners is the investment advisor for publicly-traded TCP Capital, a business development company that held International Wire's older debt securities and now owns a portion of the 2017 8.5% notes. TCP Capital also owns 1 million shares or 15.7% of International Wire's shares outstanding. With Mr. Wilson at the board's helm, International Wire would perhaps chart a more conservative path in regards to its capital structure having seen the effects of excess debt in 2004.
Depending on pricing and demand for its products, International Wire may perform exceptionally well, gracing its shareholders with additional large special dividends and continued share repurchases. Highly-leveraged companies usually do extremely well in strengthening economies.
On the other hand, the company may struggle if the economy retrenches and interest expense takes a bigger bite out of operating income.
Being right could make an investor a lot of money. However, I am simply not confident enough in the company's ability to withstand adverse conditions should they arise. Yes, the prospect of buying into a company with a history of large distributions to shareholders at 5 times earnings is attractive. But I have a list of other growing companies trading at 5-7 times earnings without a giant debt load. Knowing that, International Wire goes on the watch list for now. The company might be a great buy in the middle of the next recession when the market is acting like no one will ever buy copper wire again. In late 2008/early 2009, International Wire Group traded all the way down to $8.50 per share, only to distribute $15.52 per share in the dividends in the three following years!
Disclosure: No position.