Insteel Hoping That Higher Construction Spending And Better Spreads Lead To A Long Summer

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.

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Insteel Hoping That Higher Construction Spending And Better Spreads Lead To A Long Summer

Investopedia: Will Obama's Plan Boost Infrastructure Names?

The election cycle is in full swing and with a lagging economy looming large as an issue, President Obama has come out with his own package of proposals to get the economy and job numbers moving in a more favorable direction. One of the centerpieces of the program is another boost in infrastructure spending.

Assuming that the President can get this package through Congress more or less intact (and that is no guarantee), it is worth considering the investment consequences. If billions and billions of dollars work their way through to roads, transit systems and other public works projects, can infrastructure stocks finally get moving in a more positive direction?

The Size of the Bid
Although the details will almost certainly change as bills are debated and amended, President Obama proposed as much as $140 billion in infrastructure spending, with possibly $50 billion being put on a so-called "fast track." The reasons to do this are pretty familiar - the projects themselves will put people to work (both in construction and related industries like steel and concrete) and better infrastructure has typically correlated with improved economic performance.


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Investopedia: Texas Industries For Patient Investors Only

Although the stock of cement and aggregates producer Texas Industries Inc. (NYSE:TXI) has bounced about 50% off the mid-2010 lows, investors may yet be in for a long wait with this company. Residential construction keeps digging its way to a new bottom, commercial construction is not substantially healthier and states across the country are facing choking budget problems. All in all, then, waiting for fundamental improvement here is a bit like watching cement dry ... though there is very likely substantial value buried deep within the story. 

The Quarter That Was
There was no logical reason to think that Texas Industries would have a strong fiscal quarter and the company did not by general standards. This is a case, though, where investors might want to look a little more carefully, and doing so shows a better picture. True, revenue growth of 4% is not going to make anybody forget about Apple, but 4% growth in this housing/construction environment is a pretty good result. That's all the more relevant, given that the company also surpassed the average topline estimate for the quarter by about 5%.

Cement revenue was flat, as an increase in shipments offset a decrease in prices, while aggregates posted low-teens growth on a strong improvement in shipped volumes. Consumer sales were up 4% as a double-digit increase in shipments was offset by a nearly double-digit decrease in realized prices. (For more, see Opportunities In Cement.)

Profitability is not quite as good now, though. Gross profit fell 28% from the year-ago level and only the aggregates business showed improvement (and aggregates happen to be the most profitable from a gross margin perspective). Operating loss expanded from the year-ago level, but the company did have positive operating cash flow for the first half of its fiscal year and nearly cleared its maintenance cap-ex needs.


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