Volume Remains The Critical Driver For Insteel

Insteel (IIIN), the country's largest independent manufacturer of steel reinforcing products, is a challenging company to evaluate as an investment. On one hand, I believe this company is run along very sound lines, with management looking to drive higher value-added sales and consolidate the industry, while also distributing cash to shareholders through dividends, special dividends, and buybacks. On the other hand, this company is basically a "commodity-plus" type of business, where demand is largely outside of management's influence, where pricing spreads have significant influence, and where capacity utilization is critical to margins.

I wasn't thrilled with the valuation when I last wrote about Insteel (in September of 2016), and the stock chopped lower until starting to rebound this fall. At this point, I am cautiously optimistic/bullish on the company's prospects. Demand should improve to a level that can drive attractive capacity utilization and pricing should continue to help spreads - both of which are good for margins. Valuation remains tricky, though, as I think the company needs to get over a $110M/quarter run-rate in sales to really offer attractive upside.

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