Infrastructure Growth Stock Preformed Line Products: Debt

Preformed Line Products (NASDAQ:PLPC), based in Mayfield Village (Cleveland), Ohio, with global operations manufacturing "high quality cable anchoring and control hardware and systems, fiber optic and copper splice closures, and high-speed cross-connect devices" for the telecommunications, broadband and cable television, power utility and other markets, is a growth company with a stock with deep value characteristics. Many value stocks are misunderstood, but this seemingly simple company is just unknown. Not only is there no Wall Street coverage despite years of consistent success and a market cap of $285mm, but management, while quite capable and particularly well-aligned economically with outside shareholders, doesn't seem to care about the stock: No conference calls and no investor presentations. While there is no clear catalyst for value-recognition, PLPC offers a compelling entry for patient investors who are constructive on emerging markets growth.

Business Background

PLPC began operations in 1947 when engineer Tom Peterson invented a new way to provide a secure fit and protect conductors in electrical power lines, the PREFORMED Armor Rod:

While the company continues to sell this technology, it has evolved tremendously over the years, expanding most recently in 2012 into the agriculture market with splicing and bracing solutions based on the same helical preformed rod technology to prevent abrasion and fatigue damage in fencing solutions.

Stepping back, the company entered the telecommunications industry in 1968 with an acquisition. In 1993, it used another acquisition to enter the cable television industry. More recently, it gained access to the solar market in 2007 when it bought DPW Solar.

PLPC has used acquisitions to expand internationally as well. In 2009, it bought Dulmison, a former licensee that had become a competitor based in Indonesia and Malaysia, from Tyco Electronics. It also expanded in New Zealand when it bought Electropar in 2010.

Only 25% of the company's assets are in the U.S. Through the first three quarters of 2012, 62% of sales and 54% of net income was derived outside of the U.S., despite very tough currency headwinds. PLPC has been in the international markets since the 1950s and operates subsidiaries in Australia, Brazil, Canada, China, Great Britain, Indonesia, Malaysia, Mexico, New Zealand, Poland, South Africa, Spain, and Thailand, providing customer service in over 100 countries. The big driver in emerging markets revolves around transmission and distribution of electrical power.

For the past several years, formed wire products have accounted for about 65% of sales. Protective closures have represented about 15%, with the balance between data communication cabinets, plastic products and other products. The company believes it is the world's largest manufacturer of formed wire products for the energy and communications markets. It cites 3M (MMM) as the primary domestic competitor for pressurized copper closures. In the fiber optic closure market, competition abounds, with the company citing Tyco (TEL), MMM and Corning Cable Systems (GLW).

Management

CEO Rob Ruhlman (55) has served in that role since 2000, taking over from his father Jon (who married the founder's daughter). He joined the company in 1979 and became a director in 1991. His promotion to CEO followed his service as President and COO from 1995. The senior team has been intact for many years and includes CFO Eric Graef (60), William Haag (48), VP - International Operations, Dennis McKenna (45), VP - Marketing and Global Business Development and David Sunkle (53), VP - R&D and Manufacturing.

While there is no doubt that this is a family business, with Ruhlman presiding over a relatively weak and unimpressive Board of Directors that includes his mother and younger brother and several trivial related-party transactions (like his son working as a mid-level manager), insiders have substantial skin-in-the-game. Overall insider ownership represents 55% of the company, with the bulk of the shares owned by the Ruhlmans.

Recent Fundamentals

In the first three quarters of 2012, PLPC has grown reported sales by 5% compared with the prior year. This includes the benefit of an acquisition (2.6%) but also the negative impact of weak foreign currency (4%), suggesting 6.5% constant-currency organic growth, which is favorable relative to other Industrial companies. EPS has grown 8%. Not bad for a tough year!

Gross margin has been relatively flat at 33.3%, with improvement in costs masked by unfavorable currency changes. SG&A has increased 4%, but 8% excluding currency changes, and represented 22.9% of sales, suggesting an operating margin of 10.4% compared with 10.5% a year ago.

Looking at cash flow, cash provided by operating activities of $35.3mm has improved dramatically compared with a year ago due to improvements in working capital. The company has used $18.8mm for investing activities, including $5mm for acquisitions and the balance for PP&E. CapEx has been somewhat elevated in the past two years, running ahead of D&A. Cash used for financing increased from almost zero a year ago to $20.6mm through Q3 as the company has paid down debt.

The balance sheet now shows net cash of about $3 per share, with total cash of $28mm and debt of $16mm. The company increased its revolver to $90mm earlier this year and has $75mm available.

Taking a longer-term view, the company has grown sales over the past five years at a compound growth rate of 14% and EPS at 22%. In other words, the company has almost doubled sales since the 2007 cycle peak. Impressively, the company has slightly reduced its share-count during that period while maintaining its net cash. Tangible equity has increased almost 50% from $137mm to $205mm. In the four years ending 12/31/11, it generated operating cash flow of $93mm and allocated it as follows:

As I mentioned, the company generated weak cash flow in 2011 and increased its debt by $19mm, but that has almost completely reversed in 2012 as the company reduced debt by $14.5mm.

Valuation

Despite being "high and to the right" in terms of price action and earnings, PLPC stock is extremely inexpensive:

The trailing P/E of 8.8X would seem to be indicative of a company with a lot of debt and little growth, though this is not the case. Over the past decade, the median trailing P/E has been almost 17X. Looking at Price/Sales, the current 0.6X is near the low of the past several years and well below previous levels. Looking at Enterprise Value ($275mm) to EBITDA ($59mm ttm), the current 4.7X is also at a decade-low level. In terms of price relative to tangible book value, the stock currently trades at 1.4X.

Revaluation to the mean on P/E or P/S would suggest that the stock could double over the next year or two presuming sales and earnings continue to advance. My own forecast for 2013 and 2014 is for sales of $508mm and $559mm respectively, both representing 10% growth. The company has been smart with acquisitions historically, but I don't assume that it completes any. At .9X sales, the stock would trade at 86 by the end of 2013 and 95 by the end of 2014. Given that margins are improving, it's possible that the stock could reach 1X sales, suggesting 105 by the end of 2014.

Looking at EPS, I project the company to earn 7.21 in 2013 (+20%) and 8.22 in 2014 (+14%). These represent net margins of 7.5% and 7.8% respectively. Assuming 14PE on a trailing basis, the stock could trade at 101 by the end of 2013 and 115 by the end of 2014. A year from now, based on my earnings projection, PLPC at 101 would be trading at just 12.3X forward earnings, still a discount to the S&P 500. For those interested in my assumptions between sales and earnings, I project a 33.5% GM in both years and SG&A declining to 22.2% in 2013 and 21.8% in 2014 and am using a 33% tax-rate.

Conclusion

PLPC has a history of strong growth that is likely to persist, driven primarily by development in emerging economies. The company has continued to grow earnings to record levels despite the challenges of a weak global economy and weakening foreign currencies. While results have been strong, temporarily weak cash flow generation in 2011 may have raised some doubts regarding near-term prospects. Insider ownership of more than half the stock hurts liquidity, but it also offers powerful alignment for outside investors, which include Royce & Company and Keycorp. Lack of even minimal promotion by the company and total neglect from Wall Street leave the stock at a valuation that suggests minimal downside and the chance to potentially double over the next two years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have been long PLPC in my Top 20 Model Portfolio (InvestByModel.com) for almost two years

This article was written by

Alan Brochstein, CFA, was one of the first investment professionals to focus exclusively on the cannabis industry. He has run 420 Investor, a subscription-based due diligence platform for investors interested in the publicly-traded cannabis stocks that he has moved to Seeking Alpha, since 2013, and he is also the managing partner of New Cannabis Ventures, a leading provider of relevant financial information in the cannabis industry since 2015. Alan is based in Houston. He and his wife have two adult children.

Before focusing exclusively on the cannabis industry in early 2014, Alan had worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment advisors. In addition to advising several different hedge funds and investment managers, including Friedberg Investment Management, where he participated as a member of its investment management committee, Alan was also a senior analyst for the independent research firm Management CV. In 2008, he began providing a first-of-its-kind subscription-based service for individual investors, Invest By Model, which offered two different portfolios that investors could replicate in their own accounts. Alan also offered The Analytical Trader at Marketfy, where he used fundamental and technical analysis in a disciplined process to offer specific trade ideas geared towards swing traders.