General Cable: Anything But Generic

General Cable (BGC) goes down in my book as one of those investments that passed right under my nose until it came back and smacked me in the face. The stock has returned over 120% year over year, yet gets virtually no press. The reason this one is especially ironic is that I was face to face with a company leader and didn't research the company's prospects myself and pull the trigger following this encounter. About a year ago, a senior executive from this company was a guest speaker in one of my MBA classes. I recall being thoroughly impressed with his charisma, experience and leadership style. He was ex-British military and delivered a story of his company's recent tactics and execution that left quite an impression on me. He had taken us through a case study in a new strategy his company pursued in diversifying their business into energy and telecom and the payday that had ensued as a result of their execution and focus on customer service. Had I gone back and done my homework following this encounter, I would have found that from the prior year period (July 2005-Jul 2006), the stock had rallied over 140%! I could have then enjoyed a further 120% to date with more likely to follow.

The name is as generic as it gets. What does General Cable do?

General Cable derives its revenues from a broad array of products and services, which helps it mitigate risk in various industry down-cycles and react to rapid changes in commodity prices. It offers copper, aluminum, and fiber optic wire and cable products worldwide. It services various industries from electric utilities to telecom and networkers. With the boom in energy prices, it has benefited from high margins in its refining, natural gas and oil extraction sales. It services these customers with a premium quality/priced product and very strong focus on customer service metrics, which is their differentiating factor. They benefited from the destruction of oil rigs following Katrina, the rapid expansion in oil exploration worldwide, the international construction boom, and the continual upgrading and return visits from satisfied customers in the various industries, including the highly regulated nuclear industry. Although it sounds like a bit of a commodities business, they invest heavily in Research and Development and include their customers in the development of their pipeline and pricing models to optimally focus on high profit margin product cycles. Think of them as the best in breed of this surprisingly important sector.

The fundamentals - Where from here?

The stock reached another all-time high today and has no signs of abatement. Worldwide demand continues to be strong and barring a global recession, or some sort of accounting irregularity, the stock's fundamentals are strong. The barrier to entry in this business are high due to the intellectual property and recurring business model. Additionally, General Cable has been an acquirer of competing firms in China and Canada of late. Their leadership is unlikely to be supplanted any time soon. Best in class service in concert with high customer satisfaction in an industry with constrained supply equals pricing power.

Recent performance vs. S&P500:

Following their prior earnings announcement in May, the stock rallied 12%. The details are listed below:

Yahoo news release

General Cable Investor Website Outlining Most Recent Earnings Details

Disclosure: none

Comments

[Yael Pipano:]

Investor's Business Daily
Cable Maker Prospers As Emerging Economies Meet Energy Demand
Friday December 14, 5:53 pm ET
Brad Kelly

Lucrative business opportunities lie within the borders of emerging economies around the globe. Everybody wants in.

Growing populations in places like China and India have triggered a surge in energy consumption. The need to supply electricity and other energy has driven General Cable (NYSE:BGC - News) into these markets.

The maker of low-, medium- and high-voltage cables for electric utilities, infrastructure and other applications expanded its global exposure with its newest acquisition.

In November, it purchased the wire and cable business -- known as Phelps Dodge International -- from mining giant Freeport-McMoRan Copper & Gold (NYSE:FCX - News) for $710 million.

"This was a transformative transaction for us and one that accelerates our globalization plans by many years," General Cable CEO Gregory Kenny told IBD. "The developing economies that are served by PDIC are continuing to grow much faster than the developed world."

Nat Kellogg, an analyst with Next Generation Equity Research, said PDIC generates the vast majority of its business from international markets, where demand for energy is surging.

With PDIC in the fold, General Cable should generate north of $6billion in revenue in 2008, Kellogg said. That would be a 30% jump from this year's expected total of roughly $4.5 billion.

In the developing world, infrastructure growth and industrialization are driving a demand for power.

For example, Brazil's Lights for All program is an ambitious project to bring power for the first time to all the villages in South America's largest country.

"It is a multiyear program of rural electrification," Kenny said.

These projects are occurring all over the globe in developing regions, such as Africa, South America and Southeast Asia. These are all areas that General Cable has targeted with its acquisitions.

Meanwhile, European nations and the U.S. haven't made a meaningful investment in electrical infrastructure for more than 40 years. But all of that is about to change, which will benefit General Cable.

More than three quarters of the company's sales are related to utility and electrical infrastructure spending, Kellogg said.

"We believe (infrastructure spending) is still in the early stages of a multiyear upgrade and build-out cycle as developed nations' utility companies are in better financial condition today then they have been in years," he said.

In the U.S., electric companies are expected to spend on average $14 billion a year over the next decade on distribution infrastructure and installing new equipment, according to the Edison Electric Institute.

The institute, which represents investor-owned utilities, said electric companies are planning to spend $31.5 billion from 2006 to 2009 on the nation's transmission system. In the first five years of this decade, utilities already pumped $28 billion into the system.

General Cable's history dates back to the 1830s. It originally made wire for women's hoop skirts. But that all changed when it supplied the insulated wire to Samuel Morse for his historic communication between Washington and Baltimore in 1844.

Over the years, the Highland Heights, Ky.-based company has made cables and wires for some big projects both here and abroad.

For instance, it supplied all of the cable for the power transmission line -- more than 1,600 conductor miles -- from the Hoover Dam to Los Angeles in 1935.

Thirty-five years later, it installed the highest underground distribution line at Pikes Peak, Colo. The cables used to build the infrastructure for the 1992 Barcelona Olympic Games were made by General Cable.

Its wires and cables are primarily used for electrical purposes, such as transmission and distribution lines. But its products also extend to applications such as industrial, mining, military, nuclear, automotive and communications.

Its communications business makes, among other things, copper and fiber cables for local area networks. The business has done very well abroad due to the demand for data, Kenny said.

The cable maker became a global juggernaut with its $440 million acquisition of London-based BICC in 1999. Once completed, the deal made General Cable the second-largest electric wire maker in North America and third-largest in the world.

"This began the transformation of the company from what primarily was a communications-orienta... cable maker with some lighter duty electrical products to begin to get into the heavy electrical products that would be used in energy exploration and transmission and distribution," Kenny said.

General Cable is always on the lookout for acquisitions that enhance its product portfolio or geographic footprint.

Over the past two years, the company bought four firms, including PDIC, that increased its global exposure. These acquisitions cemented General Cable's position in Mexico, China, India, South America, Africa and Southeast Asia.

In the past two years, acquisitions have added new products to its portfolio, such as high voltage aerial and underground energy cables and electronic cables.

Earlier this year, the acquisition of the German firm Norddeutsche Seekabelwerke (NSW) from Corning (NYSE:GLW - News) added offshore underwater power umbilicals and submarine fiber optic into its portfolio.

"Every acquisition we've done has been aimed at bringing skill sets that touches the energy world, from exploration to alternative to transmission distribution," Kenny said.

The integration process after an acquisition always remains a risk, Kellogg said. But General Cable successfully has merged the newly acquired entities into its operations.

One way it has created synergy is by consolidating duplicate manufacturing plants. This has cut costs and improved operating margins, Kellogg said.

The wires and cables manufactured at its 32 plants primarily use copper and aluminum. General Cable processes more than a billion pounds of metal a year, Kenny said. almost 75% of that is copper.

Material fluctuations in metal prices, particularly copper and aluminum, can make it difficult for the company to continue to expand margins, Kellogg said.

In the third quarter, General Cable reported that the price of copper hit $3.48 a pound and aluminum reached $1.19 a pound. Copper and aluminum are trading above their average prices of 85 cents and 65 cents, respectively.

"Right now we've seen metals, year-over-year, begin to be equal to the prior year and forecasts show that cost is declining slightly going forward," Kenny said.

While prices are at historic levels, the cable maker continues to produce strong quarterly results.

2008 Jan 02 07:36 PM