Preformed Line Products (PLPC) is a current pick of GuruFocus’ Historical Low P/S Screener. The company’s shares have experienced close to a ~50% drop in price over the past 12 months, and its P/S ratio is close to its ten-year historical trough levels.
Let’s take a look at the current business model and reasons for the compression in valuation to better assess whether this represents a buying opportunity for investors.
The business:
PLPC designs, engineers and manufactures products for the communications, energy ”¨and solar power markets. These products include cable-anchoring devices, conductor hardware, vibration control systems, solar racking and fiber optic and copper splice closures. Today, PLPC is the largest supplier of a full line of formed-wire helical products for energy transmission and distribution as well as communication industries. Let’s go through what that exactly means for their main segments:
- Energy – Offers solutions for supporting, protecting, terminating and splicing transmission and distribution lines. Basically products that help transmit energy through the grid.
- Communication – Offers fiber optic splice closures, organizers and trays (major components for large telecom equipment).
- Special Industries – Specialized wiring equipment for specific uses in agriculture, buildings, mining, and more. For example PLPC makes wiring structures to support tree growth and bracing solutions used in the construction of metal building frames.
Regardless of the industry, formed wire products are the principle products. The company introduced formed wire products to the power industry over 60 years ago, and their invented helical design enjoys an almost universal acceptance in the company’s end markets. Formed wire and related hardware products were approximately 68% of the company’s revenues in 2013, 69% in 2012 and 67% in 2011.
What drives demand?
The demand for the company’s products comes primarily from new, maintenance and repair construction. A single malfunctioning line could cause the loss of thousands of dollars per hour for a power or communication customer. A malfunctioning fiber cable could also result in substantial revenue loss. For this reason, PLPC’s products are often used on a proactive basis by customers to prevent lost revenue.
The primary growth driver however is a continued build-out of energy transmission and distribution infrastructure. The grid is essentially an interconnected network of high voltage aluminum conductors used to transport large blocks of electric power from generating facilities to distribution networks. Virtually all electrical energy utilities are connected with at least one other utility by one of these major grids.
With demand for power now exceeding supply in some areas (especially with the rapid deployment of renewable energy sources such as wind in sparsely populated states), the need for the movement of bulk power from the energy-rich areas to the energy-deficient areas means that new transmission lines will likely be built, and many existing lines will likely be refurbished. In addition, increased construction of international transmission grids such as those being constructed in the E.U. should create further opportunities.
Valuation:
As can be expected, spending on PLPC's products has seen periods of cyclicality:
In addition, profitability has shown significant levels of volatility, with EBIT margins appearing to be in steady decline since 2012.
Despite struggling profitability and revenue growth, shares have traded roughly flat over the past three years.
As can be expected, this has caused PLPC’s valuation to expand over recent years on an EV/EBIT basis (lower profitability, stagnant share price). Despite the recent price decline, PLPC’s valuation has doubled off its lows in 2012. So even on a seemingly attractive P/S valuation, investors are still getting less operating income per dollar of sales.
What has hurt profitability and can this be fixed?
The level of intensity of competition has increased due to the anticipated growth in the telecommunication and data communication industries. The company’s competitors in the telecommunication and data communication markets are larger companies with significant influence over the distribution network. Additionally, during the past several years, industry consolidation has quickened as distributors and service provider consolidations took place in their major markets. So PLPC has seen increased profitability pressures from almost every type of customer.
In addition, the company has struggled to sell into its sell-proclaimed biggest growth market: international markets. These accounted for a stagnant 60%, 59% and 60% of sales in 2013, 2012 and 2011, respectively.
Major sales from Gurus and insiders:
Not encouragingly, PLPC has seen a drastically reduced shareholding interest from both insiders and Gurus alike.
Conclusion:
To be attractive, investors will need to bank on a return to historic levels of profitability. Then, a return to a normalized P/S valuation can be expected. At its median P/S level, PLPC shares do look attractive. With sluggish revenue growth and increased competitive pressures, however, investors would need to do a bit more digging to see whether higher profitability is feasible over the coming years.
Please see GuruFocus’ Historical Low P/S Screener for more ideas like this one.
