IPO Analysis: Houston Wire Looks Solid (HWCC)

Apr.28.06 | About: Houston Wire (HWCC)

Story: They make wire. All kinds of wire.

Company: Why be interested? For one, we were so sick of looking at crap companies with crap financials, that it's just sort of exciting to find a company coming public these days that actually deserves the financial help -- having proven that they have a functioning business model. That is, they've been profitable for 3 years. The sector is boring, but there is a particular little spin on their financials I'm going to highlight that makes them worth a look. Bear with me a minute.

In their prospectus they give FY 2003-2005 data. Revenues of $149M, $173M and $214M, gross income of $35.1M, $41.3M and $55.7M, and operating expenses (after adding a couple things back in) of $28.445M, $29.057M, and $32.723M. That gives operating income of $6.7M, $12.2M and $23.0M, OP margins (operating income/revenue) of 4%, 7% and 11%, and the more important OOP margins (operating income/operating revenue(=gross income)) of 19%, 30% and 41%. The OP margins are small, showing it's a low margin business, but the fact that they are expanding shows that they run the business well, have their operating expenses nearly fixed, and are growing their top line. On top of that, the fact that their OOP margins are expanding shows again that their expenses are fixed, and they get to keep an ever greater chunk of their top line growth.

Exactly what we like, and refreshingly Solid. The main concern is that they have some significant other expenses we've classed as non-operational, of which taxes (going up) and interest (going down) are the two biggest terms. But even with those they have been net-income profitable each year ($0.216M, $4.8M and $12.5M).

Stock: Here's the real kicker: after they list they anticipate only ca. 9M shares outstanding. That gives them a current operating EPS of $2.60 ($23.0M/9M) and an EPS of $1.40. But given their controls, both their net and operating earnings are likely to expand by $9-10M/year. Not alot, but on a per-share basis, given the low share number, they could quickly double EPS.

They are shooting for a $112.7M deal on ca. 9M shares, so that gives them a target of ca. $12.50/share. At that price they would have a P/E of 9 and an operating P/E of 5, which could even be something of a discount to the market.

We'll have to wait until HWCC prices and lists, but if they come out at a market neutral P/E they may be interesting. If they get a market multiple, they are probably not dynamic enough to be interesting.