Monday, February 20, 2017

A Small Cap Holding: Insteel Industries (IIIN) by Mike Robinson. "Heading IN the Right Direction"

Insteel Industries, Inc. (IIIN, $37.08): “Insteel is IN the Money”
By: Michael Robinson, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Insteel Industries, Inc. (NYSE:IIIN) manufactures steel wire reinforcing products for construction applications. Their two segments are welded wire reinforcement and prestressed concrete strand.  The company sells a majority of its products to the nonresidential construction industry.
• IIIN grew 1st quarter sales 1.6% over the same quarter last year.
• IIIN was announced that it would be included in the Russell 3000 on November 10, 2016, causing a 10% jump in the stock price.
• Since the purchase of IIIN, the stock has participated in the Trump Rally and increased ~33%.

Key points: On January 19, Insteel reported their first quarter earnings. Net sales for the quarter fell 9% from the previous quarter. This is because construction slows down during the winter months making the first quarter usually the lowest earning quarter for IIIN. The sales were up 1.6% over the same quarter last year.

One problem for the quarter was the increase in sales of 1.6% but the net income drop of 33%. This was due to an increased cost of goods sold due to a narrower spread between steel raw material costs and Insteel’s selling prices. At the time, Insteel’s inventory contained higher than average cost units. As that inventory is sold off, the company will begin to sell their more recent lower cost purchases. This drop off of net income does not appear to be a concern for the company going forward.

Lastly, the company has very strong cash flows. Insteel ended the quarter with $57 M in cash with no debt. This puts Insteel in a very flexible position to capitalize on any opportunities that may come up. Due to the increase in infrastructure spending expected to come, this is a powerful tool to have at their disposal.

What has the stock done lately?
Since our purchase of Insteel on November 8, 2016, Insteel’s stock is up ~33%. This is partially due to the fact that we bought it at a dip in the market price. One thing to note is that the stock jumped up in price rapidly as it was announced that it would be included in the Russell 3000. The stock has also taken advantage of the Trump Rally and looks to be continuing its uphill trend as it takes advantage of the infrastructure boom.

Past Year Performance: Insteel has increased 55.08% in value over the past year, but the stock is still trending upwards. The stock is the nation’s largest manufacturer in prestressed strand and welded wire reinforcement. Through their addition of Ivy Steel and Wire Co. and American Spring & Wire Co., Insteel has placed themselves in the supreme market position to benefit greatly from increased spending in the United States infrastructure system.

Source: FactSet

My Takeaway
Infrastructure. Infrastructure. Infrastructure. This word is driving the stock price to record levels. Insteel has positioned itself as the market leader and number one choice for infrastructure deals. The non-residential construction application company has taken advantage of the 5 year FAST Act passed by Obama. I believe that in a year or two, Trump will pass his own infrastructure deal to boost jobs in the US and fix the crumbling roadways and bridges. The AIM Equity Fund should absolutely continue to hold this stock and wait for the next boom in the stock price.

1 comment:

  1. Stock Market Advisory

    TCS share buyback announcement all through trading hours drove up its shares by way of 4.1% to `2506.50 on Monday . The optimism rubbed off on peer Infosys BSE 0.63 % too, which closed 1.2% higher on hopes the firm would emulate its larger counterpart.
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