Coleman Cable (CCIX) recently had its IPO and is now trading at a very low and attractive price. Coleman Cable makes electrical wire and cable products in small retail sizes for consumers, small-to-medium companies and governmental agencies in diverse industries in the US. This is in contrast to other larger cable companies (e.g. Belden (BDC) and General Cable (BGC)), which sell cables in bulk to large electrical utilities and telecommunication companies.
Coleman has more than 22000 stock keeping units, with significant brand recognition in many categories among end-users. Their customers are reasonably diversified, and include electrical distribution, OEM/government, heating, ventilation, air conditioning and refrigeration, irrigation, industrial/contractor, security/home automation, recreation/transportation, automotive etc.
While other companies may compete effectively in niche market segments, Coleman's leading market share and brand recognition in so many channels make them the producer with the largest scale and the best overall competitive position in the retail market. Their diversification also helps the company achieve better factory utilization levels amid fluctuating demand, which is an important factor in minimizing operating costs. Because cable is heavy and expensive to transport, the cable industry is substantially a local industry with few foreign competitors. In addition, because labor costs represent less than 10% of cost of goods (while the cost of copper makes up 60% of COGs), competition from low wage countries is also minimal.
In 2006, the company achieved revenues of $423M, with gross margin of 19.3%, operational margin of 11.4%, and EBIT of $48.56M. As of Dec 2006, the company's major debt is $120M in Senior Notes, bearing interest at 9.875%, maturing in 2012. On this basis, the company had its IPO in March 2007 at a $15 share price, which puts the company at a total capitalization of $252M, or about 5x EBIT. On Mar 11 2007, Coleman acquired Copperfield, a manufacturer of automotive and boat brake and wire cables, for $215M in cash (via $100M in 7.1% revolving credit and $120M in 9.875% term loans).
Coleman estimates that Copperfield's revenue and EBITDA for the twelve months ended December 31, 2006 is approximately $520 million and $35.3 million, respectively, so Coleman is paying 6x EBIDTA for Copperfield. Copperfield has a lower operational margin (6.8%) compared to Coleman, which is due to the fact that Copperfield has traditionally priced products such that they earn a fixed dollar amount per pound of product, which compresses margins when copper prices are rising. Management expects to be able to significantly improve the margins of Copperfield.Post-acquisition, the company's annual revenues will rise to $950M. Debt levels rose to $340M, with annual interest payments of $31M. The combined operational margin of the two companies should be 8.5%, making EBIT $80.75M, or income of $50M after interest payments. As a result of the acquisition, the company recorded $64M of intangible assets that will be amortized over 5 years, resulting in some $10M reduction in net income, so taxes will be $14M, giving owner's earnings of $36M, or $2.14 EPS.
What multiple should one attach to the $2.14 EPS figure? The cable industry reached a low point in demand during the 2001-2003 post-recession period, but has since rebounded nicely due increasing global demand. The cable industry has consolidated significantly during the lean years and have been able to pass on increasing copper costs to consumers.
During the 2004-2006 period, all major cable companies recorded 10-30% year-over-year revenue growth, and Coleman has improved gross margins from 15% to 19% in that period. Given the consolidation in the industry that has taken place, it is likely that the improvements in gross margins will be sustainable in the future. Coleman management should be able to wring substantial improvements in gross margin from Copperfield's product lines with minimal cap-ex, and excess cash flow will be directed to retiring debt at returns of 7-10%.
Assuming that earnings start at $2 EPS and grows 5% annually for 10 years, with a sale of the entire company at 10 times earnings in year 10, gives a present value of $28 per share, or a PE of 14. These are conservative projections, as revenue growth has been substantially above inflation levels, and earnings will grow substantially just by retiring debt and through operational synergies.
As regards ownership of the company, CEO Yetman owns 0.5M shares, or about 3% of the company. Other major shareholders include the Hasenfield and Bistricier families, as well as SAC Capital Advisors and Jana Partners. In total, about 40% of the company is still owned by insiders despite the recent IPO, and there has been heavy insider buying when the stock briefly dropped below $12 in August 2007. Lastly, all stock options granted to management carry an exercise price of $15. Hence, insiders perceive the company to be cheap at these prices, and heavy insider ownership and the underwater stock options will help ensure that management will work to increase the stock price.
The primary risk in this investment is the hefty debt, which at $340M is about 4 years worth of EBIT. While the $240M in Senior Notes mature in 2012, the company should have sufficient cash flow to redeem the Notes before that time, and even if not, as long as the company remains operationally sound, refinancing the notes should not be difficult.
Disclosure: Author has a long position in CCIX