THR - Preformed Line Products Company: A Solid Prospect Even After Such A Great Run

2023-05-14 05:54:55 ET

Summary

• Preformed Line Products Company has had a great run in recent months, with shares driven higher by robust financial improvements.
• This trend looks set to continue for the foreseeable future, though the stock isn't as cheap as it was.
• In all, though, the business likely does offer some additional upside from here, especially if recent performance is any indication of what the future holds.

One of my best investment calls over the last year has undoubtedly been Preformed Line Products Company ( PLPC ). For those who don't know, the company is a niche player that caters to companies in the industrial markets. The company does this by providing goods centered around things like power conductor and fiber communication cables, protective closures that are used for fixed line communication networks, and more. Driven by robust demand for its offerings and a low share price, shares have roared higher as revenue and profits improved significantly. Even now, I would argue, the stock looks fundamentally attractive, even if we assume no further improvements from here. Given these factors, I have no problem keeping the company rated a ‘buy’ just like I had it late last year.

Fantastic performance

Compared to most anything, Preformed Line Products Company has been an undeniable winner. Since I rated the company a ‘buy’ in November of last year, shares have skyrocketed, climbing 84% at a time when the S&P 500 is up only 8.2%. My initial bullish thesis on the company was predicated on the history of stability and improving fundamentals that the company exhibited. I was also enthusiastic about the attractive backlog growth and exactly how cheap shares were, both on an absolute basis and relative to similar firms.

After such a significant increase in price, you might find it odd that I am still bullish about the company. But when you look into the fundamental data, it becomes clear that the stock likely has further upside from here. Before we get too much ahead of ourselves though, we should touch on how the business finished off its 2022 fiscal year . For that year, sales came in at $637 million. That's up from the $517.4 million generated one year earlier. Without exception, the company achieved growth across all four of its sacraments. In dollar terms, the biggest contributor to the upswing in sales was the PLP-USA segment, with higher volume in the energy product and communications categories, combined with price increases, pushing revenue up 32.1% from $257.6 million to $340.3 million. Another big driver was its set of operations in EMEA (Europe, the Middle East, and Africa). Revenue they shot up 43.7% because of volume increases in communication product sales in the region.

Profits for the company also fared quite well. Net income rose from $35.7 million to $54.4 million. It is true that operating cash flow worsened from $33.6 million to $26.2 million. But if we adjust for changes in working capital, we would have seen it rise from $68.4 million to $79.8 million. And finally, EBITDA for the company expanded from $63.1 million to $93.2 million. In fact, with the exception of operating cash flow, the 2022 fiscal year was the single best for the company on both its top and bottom lines.

Of course, we should also be paying attention to more recent data. Fortunately, some just came out. On May 4th, the management team at the business announced financial results covering the first quarter of the company's 2023 fiscal year. Revenue of $181.8 million dwarfed the $138.2 million reported one year earlier. Again, growth for the company was broad based, with volume increases and price increases pushing sales up nicely. On a percentage basis, the heavy lifter was, once again, the EMEA regions, with sales jumping around 50% year over year. Interestingly, sales for the company would have been higher had it not been for foreign currency fluctuations. So actual organic growth was quite impressive. It's also worth noting that backlog for the company continues to grow nicely. Unfortunately, management has not said what backlog is as of the most recent quarter. But they did say that it totaled $379.4 million as of the end of the 2022 fiscal year. That stacks up nicely against the $242.9 million reported one year earlier.

On the bottom line, the company continues to post better results year after year. In the first quarter of the year, for instance, net profits came in at $21.4 million. That's nearly double the $12.3 million generated in the first quarter of 2022. Operating cash flow swung from negative $5.2 million to positive $25.4 million. And on an adjusted basis, it more than doubled from $12.2 million to $27.2 million. And finally, EBITDA for the company shot up from $14.6 million to $33.2 million.

All of this growth makes a great deal of sense to me. After all, while electrical transmission products that the company sells a lot of is not exactly a growth market, it is a growth market in certain parts of the world. That's why the company has seen so much success in its EMEA regions. Even faster growth is involved in the communications side of the business, with traditional networks being replaced with fiber. Robust demand, price increases, and a dedication to acquisitions, helped the communications side of the business experienced growth that outpaced the rest. From 2020 through 2022, for instance, this side of the company went from only 24% of overall sales to 33%. That's remarkable growth.

When it comes to the rest of the 2023 fiscal year, we sadly don't know what to expect. If we annualize results experienced during the first quarter, we would get net income of $94.6 million. Adjusted operating cash flow would be $177.9 million. And EBITDA would come in at $211.9 million. As you can see in the chart above, I priced the company based on these assumptions. But I also priced it based on results from 2022 in order to be more conservative. As part of my analysis, I also compared the company to five similar enterprises. These can be seen in the table below. Even using the more conservative 2022 figures, I calculated that, when it comes to the price to earnings approach and the EV to EBITDA approach, only one of the five companies was cheaper than Preformed Line Products Company. And finally, using the price to operating cash flow approach, our prospect was the cheapest of the group.

Takeaway

Fundamentally speaking, Preformed Line Products Company is in a really good spot. Management has demonstrated a history of consistent growth. That growth continues into the current fiscal year and shows no signs of stopping or slowing down. Add on top of this the fact that shares of the company look cheap, even if results seen so far this year do not extend throughout the year. And the stock is cheap not only on an absolute basis, but also relative to similar players. Because of all these factors, I have no problem keeping it at the ‘buy’ rating I had it at previously.

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