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This is the full forensic analysis of the Encore Corporation, an industrial that specializes in copper wiring for residential and commercial builders (that's right, Uh Oh!). I will be changing the format of the posts, including only summaries in html and leaving the bulk of the report as a downloadable PDF file. From this point on, I will focus on only those manufacturers and industrials that I consider to be bankruptcy candidates, with a macro report to show the reasoning behind these actions coming up soon. Enjoy!

 Encore

Fast declining spreads between average selling price of wire containing a pound of copper and average cost of a pound of copper on account of an intense competitive environment in the US building wire and cable market has adversely impacted the performance of Encore Wire Corporation (Encore) over the past two years. The problem has been compounded by a slow down in residential construction which witnessed a sharp decline in 2007 and 1H2008. Further, slowing commercial construction in the US off contraction in economic activities, as evidenced by a decline in the manufacturing and non-manufacturing sectors, and rising unemployment levels, has had a dampening impact on Encore's average selling price and margins. This resulted in Encore's 1H2008 net earnings and EPS declining 42.8% and 41.8%, respectively, to $14.9 mn and $0.64 compared with $26.1 mn and $1.10 in 1H2007.

With no near-term turn around expected in the current deteriorating conditions in the US construction sector, Encore should expect to witness continued compression in its gross margins, with almost flat revenues in 2008 and 2009. While the continuing slow down in the US commercial construction activities should continue to strain the Company's near-to-medium term revenue growth, the margins are likely to be compressed amid volatile copper prices and Encore's lower bargain power on the pricing front. As a result, we estimate Encore's gross margins to be 8.0% and 9.0% for the next two years, down 140 and 40 basis points from the 2007 levels, resulting in our EPS estimate of $0.87 and $1.14 for 2008 and 2009, respectively. We believe that the Company's near-to-medium term performance will be determined by its ability to withstand the current volatility in the copper prices, which after rising 34.8% in 2008 to its highest ever level of US$8,985 per tonne on July 3, 2008, have subsequently fallen 14.6% till August 20, 2008, and to maintain sustained and reasonable margin levels with moderate growth in its revenues. Based on the relative valuation approach, we have valued Encore at $14.7 per share, down 22.5% from its current price of $18.9 as of August 20, 2008.

 

    I.   KEY POINTS

 

Tough times expected for Encore in the wake of impending US commercial construction deceleration. Encore's revenues rely largely on demand from commercial construction in the US. Currently about 74% of the Company's total sale volumes are attributable to the commercial construction sector. In the past few quarters, the impact of slackening demand in the residential construction sector on Encore's revenues had been compensated through simultaneous demand expansion in the commercial construction sector.

See the PDF for pro formas, valuation and further opinion on this company's prospects -