Coleman Cable Inc. (CCIX) is a diversified designer and manufacturer of electrical, electronic, communication, and bare wire cables and products. The company sells over 50,000 SKUs, has over 8,000 customers, and is a market leader in many of its vertical markets. The Company provides both branded and OEM product; with brand names that include Baron, Copperfield, Moonrays, Polar/Solar, Road Power, Signal, and Woods.
Today, you can purchase shares of CCIX for 5.0x 2010E EBITDA and 5.3x 2010E cash EPS, respectively. Based on 2011 estimates, the EBITDA and cash EPS multiple fall to 4.7x and 4.0x, respectively. Cash EPS, in this case, is defined as the Company's reported adjusted EPS (which adds back restructuring charges and shr-based comp) plus intangible amortization. If you want to nick the Company for share-based comp, that would take 2010E cash EPS from $1.20/shr down to $1.08/shr; still incredibly cheap on a $6/shr price.
These multiples are cheap on an absolute basis, but look even more interesting when compared to the Company's competitors. A comp group of General Cable (BGC), Commscope (CTV), Belden (BDC), and Encore (WIRE) yields an average 2010 EBITDA and EPS multiples of 7.5x and 17.2x, respectively. On 2011 estimates, the comp group yields EBITDA and EPS multiples of 5.9x and 12.2x, respectively. Were CCIX to trade in line with its comps, and using a blend of EBITDA and EPS multiples, CCIX target prices of $16.00 (2010 nums) and $10.50 (2011 nums) result. Even the lower (2011) multiples imply upside of over 70%.
So what drives the valuation discrepancy? Two things. CCIX is modestly more levered than its competitors, which have an EBITDA: interest coverage averaging 4x, versus 2.5x for CCIX. CCIX recently did a bond refinancing, and currently has no prepayable debt, so the credit profile is reasonable. Moreover, financials are rapidly improving, which should further enhance the Company's flexibility. More significant, though, with respect to the valuation disparity, is the Company's modest market cap. At just $105mm, the market cap isn't sufficient to pique the interest of larger institutional investors. With respect to valuation, this is of course a curse; however, the flip side of the coin is that CCIX is small enough to be an easily digestible acquisition for any number of competitors, virtually all of whom could afford to pay a substantial premium and still have the acquisition be materially accretive.
With respect to operating metrics, CCIX stacks up well versus its competitors. Both its EBITDA margins and returns on invested capital are actually modestly better than the averages of the aforementioned comp group, and are respectable for an asset-intensive, cyclical company.
Revenues for CCIX peaked in 2008 at roughly $970mm. At the time, the Company was generating roughly $20mm/qtr ($80mm annlzd) of EBITDA. The recession of 2008 and associated destocking caused revenues to drop to about $500mm. Quarterly revenues, which bottomed at $113mm in 2Q 2009 have increased every single quarter since, and are now running at $175mm/qtr ($700mm annualized). Guidance for the current 3Q implies continued top line strength, and the back half of the year is typically seasonally strongest for the Company. The Company undertook significant cost takeouts during the dark days of 2008 and early 2009, and management now believes that it can deliver the prior $20mm/qtr EBITDA peak at a much lower revenue run-rate of $800mm. $80mm annualized revenue, which is certainly achievable within the next couple of years, would translate to $1.50/shr of reported EPS, or roughly $1.90/shr of cash EPS – implying a 3x cash EPS multiple. Currently, the Company is operating at 60% capacity, with some plants focused on housing/construction products running as low as 30% capacity. Target capacity for the business is about 75%, implying another 25% upside in revenues with very little incremental capex necessary. Economic lives on equipment are substantially longer than depreciable lives, which should drive a favorable capex/D&A spread over the next several year, further bolstering cash flow.
As mentioned, the business is fairly asset intensive. The high level of SKUs leads to relatively high inventory balances, so as revenues grow aggressively cash flow is typically reinvested into working capital. As revenue once again begins to slow, free cash generation will improve substantially. As point of reference, during the "dark" days of revenue downturn in 2008 the Company generated >$100mm of free cash (or $5/shr), in 2009 the Company generated roughly $1.35/shr of free cash flow, this YTD through the 1st 6 months the Company has been a net user of cash due to the reignited top line (Y2Y top line growth of 43%).
Insiders own (either directly or through family trusts) over 50% of shares outstanding. Incentive alignment with outside shareholder is obviously outstanding.
With respect to risks, there are a couple. The Company's business is primarily US-based, so a renewed downturn would hurt the P&L (although improve cash flow). In addition, copper is a primary input and volatility in copper pricing can affect quarterly results as price pass-throughs tend to lag, and FIFO accounting can add volatility to the gross margin. That said, about 60% of the business is a direct pass-through on copper pricing. This is a much higher percentage than in the past. The remainder of the business is what the Company refers to as "mark-up", where they over time generate a relatively fixed margin above and beyond the cost of the inputs.