heuristics_and_biases, please let me throw in some disclaimers.
I do not own wire, I wish I would have when I first stumbled on it one week ago. I am an electrical contractor that buys their product through a distributor. I came here because I like their product and they dominate the market on pricing of colored wire (#8 and larger THHN/THWN). I take offence to someone telling me that I don't know a product, so let me tell you what you are shorting.
As an electrical contractor (the end user) I do not stock up on copper wire, some distributors such as graybar (privately owned) and hughes supply (just bought out by home depot)do -unfortanately in my local market they buy a majority of their stocked inventory is from southwire (privately held).
You raised a good point and I am sure it has some weight behind it, but it isn't that people are doubling their inventory.
Inventory takes investment capital and storage facilities. By nature wire is easily stolen and sold as scrap, it isn't traceable, for over a dollar a pound. I was hit just last year for over 26k in lost material and the labor to replace it. Besides to stock up you would have to know the wire type, color, and size, not to mention length that you will want. There are 9 standard colors and 15 different sizes common in engineering design. That is alot of inventory just to save a little.
I do however try to write purchase orders for a product that I know I am going to buy as soon as possible (ie copper wire). This business is about cashflow, they DO NOT charge me for a product before it is shipped and as I said before, I do not stock shipped product. I will not know exact lengths of wire that I need for a project until 1 month before I need it and theirfor do not get it shipped, I just write a purchase order to lock in the price. In this transaction, the wire manufacturor doesn't get payed a dime. They may just show an order on the books.
Lastly, I would like to point out the non proportionality of copper prices and this stock. This is almost humerous to me. Copper is nothing more than a product used in the manufacturing process of making wire. Just as fuel is a product used in shipping. Copper in not produced by a wire manufacturor. They do raise their sell price as their costs in raw materials go up and may make a percentage on that increase, but that is all it is, a fixed percentage. Some of you need to think about investing in a freight company just because the price of fuel is going up.
The price of copper is only a percentage multiplier in the ratio of volume to revenue. It DOES NOT have any implication on revenue to profit.
Long story short, I like this stock but IMO the corrilation LAGS the price of copper by a quarter, not leads.
WOW. thanks Steve... great insight fron an industry insider.
I would have to agree with you, I think people are putting a little too much weight on copper's influence on this stock.
Also the concept of construction companies playing the speculation game is quite ridiculous. I worked construction for several companies for over 10 years, and the concept of a foreman speculating and stocking up on copper is hilariously off.
It's a fast paced industry, all costs are written off and passed on to the consumer. High copper increases margins according to WIRE's CEO. Gulf construction was no doubt huge during the previous months.
However, I do hold some concern about meeting the .61 earnings estimate. That's quite high, especially as construction usually lags in the winter (except possibly in the south).
What do you all think? Earnings come out next week... Think WIRE will meet them?
You do understand very well. I think you should be wary of buying above $20-$25. With the new M/C Cable I have fair value at $25. I also have a connection to the industry. I bought WIRE this year at the low of 8.51(its OK if you don't believe me, I waited for earnings I got filled at my order price luckily). But I sold at $17 since it was close to fair value without the M/C business and it was before earnings.
I like the company and its mgmt. But, what happened after Katrina is temporory and what is happening with copper now is temporary and profits will revert back to normal. Don't let the IBD longs anchor you to these high prices. They only know charts.
"Copper accounted for approximately 76.8% and 73.0% of its costs of goods sold during 2005 and 2004, respectively, and the Company expects that copper will continue to account for a significant portion of these costs in the future."