Tuesday, January 10, 2017

Pipe Dreams

Voted into law in the weeks before the recent Christmas Holiday, the WIIN Act of 2016, providing financial support for water systems infrastructure, may have caused water pipe manufacturers to dream of pipe fittings instead of sugar plums.  For more details on the WIIN Act see the recent post 'WIIN in Water Pipelines" on January 6, 2017 Producers of iron pipes might be especially happy to see surge in water pipe spending after losing market share to vinyl pipe alternatives for the last several years. 
Image result for ductile pipe image
Prominent among the iron pipe manufacturers in the U.S. are several private companies:  McWane Ductile and American Cast Iron Pipe.  There is one new publicly traded company in Forterra with its newly acquired U.S. Pipe and Foundry subsidiary. 

Based in Birmingham, Alabama, McWane Ductile is family-owned but not a small business.  The company has disclosed over 6,000 employees in at least two dozen production plants and sales offices around the world.  As a privately-held operation, the company has disclosed only revenue figures in recent years:  $1.7 billion in 2014.  Its primary product is ductile iron pipe, which it sells in the U.S., Canada, Australia, South America and Europe.  The company also produces valves, hydrants, plumbing components and waterworks fittings.
McWane has acted aggressively to competitive threats in this domestic market from cheaper cast and ductile iron products from China, where labor costs are significantly lower than in the U.S.  Using a ‘if you cannot beat them join them approach, in 2005, McWane opened a manufacturing plant in Hebei Province, China. 
While we have not specific disclosure, we surmised McWane is profitable and cash flow positive.  The company funds its own venture capital arm for investments in technologies around the world, including wireless smart grid solutions, wireless control and monitoring technology and radio frequency systems for public safety, among other investments.
American Cast Iron Pipe is also privately held and equally out of reach for most investors.  It is headquartered right across town from McWane in Birmingham.  American has been producing iron pipes, hydrants and valves for water system since 1905.  The company also produces electric-resistance steel pipe for use in the natural gas industry.  It customers are located in both North and South America, the Caribbean, Asia, and the Middle East.
American disclosed $1.2 billion in total sales in 2015, putting it on par with its neighbor McWane in terms of revenue size and market share.  However, the company is apparently a bit more productive through its 3,000 employees.  Implied revenue per employee for American is near $400,000 compared to $283,000 per McWane employee.
U.S. Pipe and Foundry in New Jersey is another important supplier of pipe and components to the water systems the U.S.  U.S. Pipe was acquired in April 2016, by Forterra Building Products (FRTA:  Nasdaq), a producer of water management solutions and fabricator of concrete and clay building products.  The deal moved Forterra deeper into the water infrastructure market and doubled revenue and net income in the first full quarter for the combined operations.  Forterra completed an initial public offering of its common stock in October 2016, giving investors a new chance to take a stake in water system build-out.
In the twelve months ending September 2016, Forterra reported $1.35 billion in revenue, providing $8.0 million in net income or $0.19 per share.  Of course, these figures do not fully represent the potential in the new combined entity since it only includes U.S. Pipe for a few months.  The estimated revenue run rate for the company with the U.S. Pipe tie-up is closer to $1.6 billion. 
FRTA is trading at 0.89 times trailing twelve-month revenue and 16 times estimated earnings for the current fiscal year.  There is a unanimous buy rating among the half dozen analysts covering the newly public company.

Next post on producers of steel pipe for water systems.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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