Summary
- Preformed Line Products is positioned to benefit from the trend towards 5G, EV charging infrastructure expansion, and solar energy adoption.
- The company is strong financially and supports its growth through innovation and strategic acquisitions of suppliers and partners.
- Preformed Line Products is being undervalued by the market as if it is a no-growth company, but it is demonstrating strong growth, particularly in the U.S. segment.
Investment Thesis
At the current price, the market seems to be valuing Preformed Line Products (PLPC) as if it is a no-growth company. While the company has had steady revenues and profits for many years, since roughly 2016 the company has started to grow consistently. Most of this growth has been driven by its U.S. segment as the company's product portfolio is benefitting from trends in 5G adoption, electric vehicle infrastructure and grid upgrades, and solar energy adoption. Preformed Line Products is supporting this growth through innovation and acquisitions. Investors could benefit as revenues continue to climb, and the market finally realizes the trajectory of this seemingly misunderstood or ignored company.
Introduction
Preformed Line Products has been around since shortly after World War II when its founder Tom Peterson invented a helical preformed rod to secure cables. The first facility was in Cleveland, Ohio, but the company quickly began to expand both in the U.S. and globally. Today, the company exists in over 20 countries and supports a variety of industries, primarily Communications and Energy. It produces a menagerie of products largely in the realm of hardware, and the company also provides inspection services such as power line inspection using drones.
Base-Case Valuation
The market seems to be assuming that Preformed Line Products is going to have no growth, as can be shown in a simple valuation. In a no-growth scenario, one can calculate the value of a stock based with the PE ratio, which will simply be 1/(discount rate). I typically use a discount rate of 7%, which would give a PE of 14.3. Since I want to consider this over the long-term, I do not simply want to use the current EPS. Lately, the company has had higher net margins, but margins have varied over time, as shown in the following table:
Year | Net Margin |
2010 | 6.8% |
2011 | 7.3% |
2012 | 6.7% |
2013 | 5.0% |
2014 | 3.3% |
2015 | 1.9% |
2016 | 4.5% |
2017 | 3.3% |
2018 | 6.1% |
2019 | 5.2% |
2020 | 6.4% |
2021 | 6.9% |
Average | 5.3% |
If I take the trailing 12-month revenue of $597M and multiply by a net margin of 5.3% and by a PE ratio of 14.3 I get a valuation of $91.87-not far from the current share price. In a base-case no-growth scenario, the stock is fairly priced. However, since the company is in fact growing as I will describe below, the current price is clearly at a discount to where the stock should be trading.
The Growth Breakdown
Preformed Line Products has had steadily increasing net sales revenues over the past several years and just broke through the $500M threshold in 2021. However, the company has not been growing the same across all segments. It breaks down its business by geographies: the United States; the Americas (North and South America, excluding the U.S.); Europe, the Middle East, and Africa (EMEA); and Asia-Pacific. Historically, all of these segments have been relatively steady, but recently Asia-Pacific suffered from the Covid-related lockdowns as was explained in the 2021 annual report:
While the ongoing COVID-19 pandemic has not had a material effect on our overall results, it has continued to create challenges for us in countries that have significant outbreak mitigation strategies, namely, countries in our Asia-Pacific business segment, which led to temporary project postponements and continued to impact results in this segment.
On the other hand, PLP-USA has grown net sales significantly with 28% growth from 2020 to 2021. EMEA has had some growth as well over the past few years, but otherwise the EMEA segment and the Americas segment have stayed relatively stable. The chart below shows the revenues for all four segments since 2010.
Author created with data from PLPC annual reports
The company sells the kinds of products most people forget about but that are absolutely essential-things like mounting brackets, connectors, guards, insulators, and other hardware. While these items may seem boring, the company is approaching them in innovative ways and has positioned itself to benefit from some very high-growth trends.
5G Adoption
Over the past several decades, the communications industry has advanced through five generations of technology, comprised of numerous specific technologies. Each of these generations has lasted approximately 10 years, as can be seen in the figure below.
Wikicommons
Based on this, we are only four years into the 5G adoption cycle and still have several years to go. As a result, CAGR estimates for the 5G market are quite optimistic, ranging from 34% to almost 60% .
Since the mid-90s, Preformed Line Products has developed accessories for the fiber optics industry, including the COYOTE® brand of fiber optics closures and accessories. The company has continued to support this part of the business and, in 2019, acquired MICOS TELCOM s.r.o. , further enabling 5G support. Preformed Line Products has continued to innovate on these products, developing improved versions such as the COYOTE® HD Dome Closure below.
Preformed Line Products
With a portfolio of products that support modern communications networks, Preformed Line Products is in a great position to benefit from the trend toward 5G.
Electric Vehicles
As the electric vehicle market expands, the electric vehicle charging infrastructure must expand with it. Slow charger installations are increasing; even on the low-end globally, the number of slow chargers in the U.S. grew 12% in 2021. Again, Preformed Line Products is ready to take advantage, having developed an EV charging station foundation. Not to mention, the company supplies all kinds of distribution, transmission, and substation products to help get the electricity to the chargers in the first place.
Preformed Line Products
Solar Energy
The push for renewable energy is apparent, and solar is projected by the U.S. Energy Information Administration (eia) to grow faster than all other types of renewable energy sources, as of 2022 .
2022 Annual Energy Outlook (eia)
Preformed Line Products has been in the solar power hardware business for years, producing ground mounts, pole mounts, and roof mounts. One of the most innovative products it has is a solar panel carport .
Preformed Line Products
Preformed Line Products is again producing the boring accessory products, but in one of the fastest growing markets in the energy sector.
Acquisitions
One of the ways Preformed Line Products has chosen to support its expansion-in addition to its own innovation-is through acquisitions of complementary businesses. Just this month, it acquired Plastics Pilot, Inc. in Ohio to expand its injection molding capabilities and its manufacturing footprint. In June of last year, it acquired Fonderie Richelieu to expand its local manufacturing capability in Canada. In March 2022, it acquired a molded parts producer, HOLPLAST s.r.o. , in the Czech Republic. All of that was just in the past 12 months. The pattern seems to be that Preformed Line Products acquires small companies with whom it has had long-standing relationships as partners or suppliers, so these acquisitions seem very strategic.
Financials & Risks
Preformed Line Products has strong financials . It has $308 million in current assets, plenty to cover its current liabilities of $120 million. Its long-term debt is only $56 million. Even if the other non-current liabilities and deferred income taxes of $23 million is added in, its long-term debt to equity is only 0.17. Its gross margins have been incredibly consistent, ranging from 29% to 33% since 2010 at least. While net income has been negative in some of its segments from time to time, such as in AP from 2012 to 2015, in total the business has been profitable for many years. The chart below shows net margin percentages by segment over time.
Author created with data from PLPC annual reports
Another encouraging statistic is that the percent held by insiders is incredibly high, at over 51% . All signs point to this being a strong company that has been overlooked by the market. For me to be concerned about the performance of this company, something pretty significant would have to happen. The U.S. segment would have to falter, which is possible; PLP-USA briefly had a negative net margin in 2017. Even then, with a globally diverse market presence, the other segments could help carry the company as they have done while the AP segment has suffered from Covid-19 lockdowns.
Conclusion
The market is treating PLPC as if the company is set up for no growth, though in fact it has grown steadily for several years now and is poised to continue. Most of that growth is coming from the U.S. segment, as the products and services Preformed Line Products provides support some of the fastest growing markets. The company stands to benefit from trends toward 5G, electric vehicles, and solar energy. It is supporting that expansion through continuous innovation and strategic acquisitions. With a strong balance sheet and a global footprint, this company that has been around for over 75 years will likely be here for 75 more. I rate this stock as a strong buy as the market underestimates how this company is already growing, expanding, and innovating, supporting some incredibly high-growth trends.
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Uncovering The Growth Potential Of Preformed Line Products