Infrastructure Investment And Jobs Act Will Increase Demand For Construction Products

Key Takeaways

• Realization of synergies from acquisitions and strategic cost management are expected to enhance net margins and future earnings potential.
  
• Infrastructure developments may drive demand for products, while strong liquidity positions Insteel for strategic growth and expansion.
  
• Competitive pricing pressures, rising expenses, supply challenges, and import competition pose risks to Insteel's revenue growth and market competitiveness.

Catalysts

Manufactures and markets steel wire reinforcing products for concrete construction applications.

• Insteel Industries expects to realize substantial operating synergies from its recent acquisitions of Engineered Wire Products and O’Brien Wire Products, including significant reductions in SG&A and raw material costs, which should enhance net margins and earnings.
  
• Price increases implemented in response to raw material cost inflation are expected to support revenue and gross margins by improving the spread between selling prices and costs.
  
• Anticipated normalizing of gross margins after the temporary impact from purchase accounting adjustments on acquired inventory suggests improved future earnings potential.
  
• Ongoing infrastructure investments, such as those related to the Infrastructure Investment and Jobs Act, are likely to increase demand for Insteel's construction-related products, potentially boosting revenue.
  
• Strong liquidity with $36 million in cash and a $100 million undrawn credit facility positions Insteel to capitalize on future growth opportunities, which could enhance earnings through strategic acquisitions or organic expansion.

Insteel Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Insteel Industries's revenue will grow by 14.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $82.7 million (and earnings per share of $4.23) by about January 2028, up from $19.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, down from 28.8x today. This future PE is lower than the current PE for the US Building industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Insteel Industries Future Earnings Per Share Growth

Risks

• The competitive market conditions have led to a decline in average selling prices year-over-year, which could negatively impact overall revenue growth.
  
• Increased SG&A expenses due to changes in cash value of life insurance policies and amortization of intangible assets from acquisitions could further pressure net margins.
  
• The supply of domestic raw materials, particularly wire rod, has tightened, leading to higher raw material costs, which may affect gross margins if these are not offset by price increases.
  
• The import competition from low-priced PC strand entering the U.S. market tariff-free poses a risk to approximately 10% of Insteel's total revenue, potentially impacting market competitiveness and net earnings.
  
• There is uncertainty regarding the sustained demand recovery post the first quarter’s material uptick, combined with potential impacts of seasonal trends on operating hours, which could affect shipment volumes and revenue stability.

Valuation

• The analysts have a consensus price target of $34.0 for Insteel Industries based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $805.7 million, earnings will come to $82.7 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of $28.49, the analyst's price target of $34.0 is 16.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.