Insteel (NASDAQ:IIIN) is basically a "commodity-plus" type of business (meaning that there is some value-add and maybe a small moat), but management has done a very good job of running the business through the good times and bad. Although revenue isn't that much higher than when I last wrote about the company (as pricing pressure has mitigated shipment growth), the company has done a good job of leveraging capacity utilization and improving spreads to drive materially higher margins and cash flow.
The "but" is how long this can last. Non-residential construction spending has risen almost 40% from its January 2011 low, but the FAST Act should start supporting more highway spending as this year draws to a close. I like the prospects for Insteel to log multiple years of double-digit FCF margins as it further leverages its available capacity (perhaps even topping $100 million in FCF), but it's hard to see how things are truly different this time. This is a good management team, and I give them the benefit of the doubt that they will maximize the opportunity in front of them, but I think the risk/reward is no longer in investors' favor given the valuation.
Read more here:
Insteel Hoping That Higher Construction Spending And Better Spreads Lead To A Long Summer