General Cable - Time to Sell

General Cable, as the name subtly suggest, manufactures cable. Cable for what? All sorts of industries really, key segments being electric utilities, industrial, construction and communication.


The company has been able to grow its revenue tremendously from from $2.8B to $5.0B (with a lot of the growth driven by raw material price increases), but, more importantly, has grown EBITDA margins from 2.9% to 8.8%. The outcome is a stratospheric price performance of the stock which went from $4 in 2002 to $70 recently. The general sentiment surrounding the stock is very bullish. It's labeled as a 'global infrastructure play', and is trading at a healthy 11x EBITDA multiple. Let's see whether this is warranted or not.

Business Description. Co

- Electric Utilities constitute 35% of sales
- Infrastructure (aka varied industrial projects) constitutes 25% of sales
- Construction (25% of sales)
- Communications (14%) of sales

Industry Overview. Global cable industry is $160B market, that historically has grown at GDP like rates. The largest players are

Bull Case. U.S. and Europe have old power transmission and distribution infrastructure that has been primarily built in 70s, hence is in dire need of repair. As a result, spend on T&D is climbing, with Edison Institute projecting increases from $8B in 2007 to $11B in 2007. Similar trend should play out in Europe, and General Cable should be a beneficiary of this. Additionally, company participates in fast-growing segments like umbilical cables (nice name, I know), which are used to transport power/liquids to offshore oil&gas location. Offshore production is projecting to grow strongly, and General Cable, again, benefits. Company also has exposure to incredibly fast-growing Asian markets.

Bear Case. Confessing right away, this is the side I'm on. And honestly I was on it right after looking at the company long-term financials. The margins and returns on capital look simply too good to be true for this ultra-competitive industry where vast majority of products are barely differentiated. (Note: vast majority, not all. Company may tout it's acquisitions all it wants and it's a very good strategy, but the truth remains that these high-tech products are a fraction of the revenues). The industry has benefited from high utilization rates that have propelled the pricing upwards, thus benefitting the margins. Where does company derive most of its revenue from? North American and European general industrial and construction markets. And in recession general industrial activity drops off, driving down utilization and sending margins off the cliff. The latest manufacturing data for April shows the first significant decrease in utilization, but that's only the beginning. I expect EBIT margins on all non-energy infrastructure segments to fall down to 2-3% by end of 2009, while the energy infrastructure will continue to do OK, growing at 4-5% with flattish margins. As a result look for EBITDA to decline by at least 50%, and the stock by even more than that.