Tuesday, October 31, 2017

A current AIM Program Small Cap Equity Holding: Insteel Industries, Inc. (IIIN) by Stephen Arcuri. "Original thesis has decayed"

Insteel Industries, Inc. (IIIN, $25.75): “Insteel, Cemented in Place”

By: Stephen Arcuri, 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. (NASDAQ: IIIN) is the largest manufacturer of steel wire reinforcing products for concrete construction applications in the United States. They manufacture and market prestressed concrete strand and welded wire reinforcement, including engineered structural mesh, concrete pipe reinforcement, and standard welded wire reinforcement.

• Extreme weather in Insteel’s largest market, Texas, is likely to delay construction and sales through next quarter.

• Any substantial infrastructure package that would be a catalyst for Insteel’s product sales seems unlikely for the foreseeable future.

• The American Institute of Architects (AIA) recently downgraded their forecasts of nonresidential construction, one of Insteel’s largest markets.

• Management has indicated that many of Insteel’s customers are dealing with labor constraints, signaling an inability to execute on top of weakening demand.

Key points: Insteel can be expected to continue to underperform through Q1 as a combination of factors come together to hurt sales. In their Q3 earnings call, management attributed their quarter to better weather in their largest geographic market, Texas. Hurricane Harvey’s displacement of workers, and continued ramifications will be a headwind for Insteel.

With no infrastructure bill on the horizon, there is no near term catalyst to boost Insteel’s sales. The passage of the Fixing American’s Surface Transportation (FAST) Act in December of 2015 proved to be a catalyst for investors, as expectations for Insteel rose with infrastructure spending. Shares further appreciated with the promise of an infrastructure bill from both the Clinton and Trump campaigns. The administration’s failure to pass infrastructure spending is not offset by the relief aid for Hurricane Harvey; Insteel’s largest product market is public, highway, and street construction, a market less affected by the flooding following the Hurricane.

In addition, the American Institute of Architects revised their nonresidential construction estimates to 3.8% in 2017, down from an original 6.7% that the original thesis relied on. 2018’s estimate of 3.6% provides no encouragement for the short-term.

Finally, in their Q3 earnings call, management indicated that customers were having difficult securing the work force required to follow through on construction projects. Part of this may be reflected in the inventory buildup that occurred in the same quarter. Insteel’s inability to move products to customers who cannot use them will be amplified by the construction break that Hurricane Harvey will have caused.

What has the stock done lately? Insteel has been in a virtual free fall since their Q3 earnings. Shares were trading just under $34 before the earnings call, and immediately fell to $25.75, a 25% decrease. After a brief rally, prices slide further and have never closed above the selloff.

Past Year Performance:

Source: FactSet

My Takeaway
The AIM portfolio should abandon its position before Insteel releases Q4 earnings on October 19th. Insteel faces an increasingly difficult market for the next both structurally, and as management noted, from increased competition. The original thesis has decayed along with the Trump trade, and with no catalysts in sight, capital could be more effectively deployed. Insteel would be worth reviewing after 1Q’18, after Hurricane Harvey has worked itself through Insteel’s cycle, or if the administration becomes serious about passing an infrastructure bill.