Friday, January 13, 2017

Shining up the Pipes

Steel fabricators are putting a shine on their pipes following passage of the WIIN Act of 2016, providing new federal financial support for water systems infrastructure.  Steel is one of several materials used to fabricate water mains and pipes to transport potable and waste water.  The invention of the Bessemer process and the adoption of open hearth furnaces for making steel in the mid-1800s helped make steel a viable alternative to the wooden pipes that had been used in water systems.  Over the years rivets were replaced by welding and other fabrication efficiencies developed that have given steel a significant share of the installed water system infrastructure.
Among the shiniest steel pipe makers is Northwest Pipe Company (NWPX:  Nasdaq).  Engineered steel water pipe is Northwest’s specialty, putting the company at the top of the list of steel pipe manufacturers in the U.S.  Northwest’s proprietary press-fit interlocking connection system for joining casing pipe sections has helped capture market share, especially for the applications where installation is challenging or time sensitive.  Besides the water infrastructure market, Northwest sells pipe for applications in energy, mining and manufacturing.  

Northwest has several high profile customers in the water industry that could serve as references as water systems take advantage of the WIIN Act to upgrade water distribution.  The U.S. Bureau of Reclamation along with three water conservation districts in Utah used Northwest’s steel pipe lined with a polyurethane coating to enclose a canal and prevent loss of water in the Central Utah Water Conservancy District.  In Texas the company’s pipe was installed over 148 miles to bring water from Lake Palestine in Texas to the Tarrant Regional Water District and the Dallas Water Utility.
In the twelve months ending September 2016, Northwest reported $162.6 million in total sales of engineered steel water pipe and casing pipe among other products used by its water system and industrial customers.   The company had been profitable historically, but seems have had some challenges remaining in the black over the last couple of years.  Each of the last four quarters has come in with an operating loss.  Ouch!
Some might expect to see AK Steel Holding Corporation (AKS:  NYSE) among the steel water pipe producers.  Based the heart of industrial America in Ohio, the company produces flat-rolled carbon, stainless and electrical steel as well as  specialized steels in both shaped and finishes.  Most of its customers are in the automotive industry and use AK’s flat-rolled carbon steel to make car bodies and frames.  There might be some opportunities of AK Steel because of the new emphasis on water infrastructure, but the WIIN budget might not be a big enough carrot for the company to make significant changes in its product line.
Allegheny Technologies, Inc. (ATI:  NYSE), which produces flat-rolled steel products as well as high performance steel components.  Allegheny has built up a reputation for steel alloys using titanium, nickel, cobalt, and zirconium among other metals.  Margins on these metal alloys are substantially higher than on simple steel pipe that might be used for water pipes.  Although some of Allegheny’s steel ends up in water pipes, these are typically used in a chemical, food or pharmaceutical processes, where high performance piping is mission critical.  Thus Allegheny is another giant in the steel industry that is not likely to participate in the ‘WIIN.’
Thus a stake in ‘steel for water’ using a public company vehicle makes Northwest Pipe is the most direct choice.  Granted there are more compelling stocks.  The company is not profitable.  There is no dividend.  Nonetheless, operations have generated positive operating cash flow, an accomplishment that has helped keep Northwest’s balance sheet in good shape.  Cash balances have grown over time and the company has limited outstanding debt.   

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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