General Cable (BGC) is not only one of my Ten Clean Energy Stocks for 2010, it was also holding its own in my list of "strong grid" (that is, electricity transmission) stocks that have strong financials. About 59% of the company's revenues come from what I would consider "strong grid" markets: their "electrical utility" and "electrical transmission" segments. I published the most recent version of that list on February 11. In both these articles I cautioned that I did not think it was yet time to start buying the companies I covered. Rather, these were companies to buy after a price fall.
The same day I published my recent strong grid list, General Cable reported a net loss of $0.17 for the last quarter of 2009, and lowered guidance for Q1 2010. Adjusted earnings were in line with what analysts were expecting, but the lowered guidance spooked shareholders. The stock got whacked. So is it time to buy?
I'm personally not all that concerned by a couple of quarters of lousy growth, but I want to know about anything that might hamper the company's long term viability, so I decided to dig a little deeper by reading the Q4 2009 earnings call transcript. Here are my take-aways:
- The company has been focusing on reducing operating costs this year, and has strongly improved cash flow from operations over previous years (a large part of the reason it's on my lists).
- The US utility market was unexpectedly week in Q4 09 (this may have been due to the fact that many stimulus programs ended up delaying spending in the targeted areas).
- The company is expanding internationally and using its greater financial strength to out-compete or buy up smaller competitors in a difficult economy. They expect 2010 to be a "bottoming" year in terms of demand for their products.
- The company does not expect to see any strength in North American utility markets for at least two quarters.
- While the US has not yet begun to act to build needed electricity infrastructure, Europe (also currently weak) is well into the planning stage, and is likely to be a strong market over the next five years.
- Rising commodity prices have hurt reported earnings because of their last-in-first-out [LIFO] accounting. This means that BGC's earnings will appear relatively low when commodity prices are rising, and relatively high when commodity prices are falling in relationship to non-LIFO competitors. The implication is that a good time to buy the stock would be near a commodity price peak.
- The company has a strong presence in developing markets, where it continues to pursue growth opportunities. However, they intentionally have very little of their business in China.
Most of General Cables markets lag the economic cycle. Since we're only seeing glimmerings of an upturn, it will be a while before BGC's revenue and pricing power recover. Furthermore, capacity utilization in the cable market is very low world-wide: even with an upturn in volumes, cable pricing is likely to remain very competitive for quite some time. In the long term, this is good for General Cable, because it will squeeze weaker competitors out of the market, but in the short term, I would not be surprised to see some more disappointing quarters.
I don't see any systematic problems that worry me. While I believe that commodities are in a long-term uptrend, which will hurt reported profits because of LIFO, it should have no net effect on real earnings. The industry continues to shake out until the surviving players can pass on cost increases to customers. General Cable is likely to be one of the survivors.
At $23.85, I think the stock has not yet hit its low for the year. The valuation looks good, but there will probably be more earnings deterioration next quarter. The 1Q 2009 earnings were $1, and the company is providing guidance that they will only be $0.05 in 1Q 2010. That will lower the "E" and raise the P/E ratio, which probably allow for a bit more downside movement in the stock price [P].
I currently guess that the best time to buy will be a month or two after the Q1 2010 conference call, possibly in June, but I will re-evaluate that guess after the next earnings call. I still hold a small long position in the stock which is partially hedged with a covered call. The call will expire this month, and I'm not planning to write another. I could be wrong about where the stock bottoms.
Selected data as of 2-20-2010:
|P/E (trailing 12 month)||9.66|
|Cash per share||$8.70|
|Months to pay off net debt from cash flow||20 months|
|Revenues from "Strong Grid"||59%|
DISCLOSURE: Long BGC.