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Preformed Line Products Company (PLPC) |
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WIKI ANALYSIS
Summary
PLPC is an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication) and other similar industries. PLPC’s products include formed wire and related hardware products, protective closures, data communication cabinets, plastic products and other products. The Company’s primary products support, protect, connect, terminate and secure cables and wires. It also provides solar hardware systems and mounting hardware for a variety of solar power applications.
Competition
The markets that PLPC operates in are highly competitive. The principal methods of competition within those markets are price, performance, and service.
| Company | Ticker | Market Cap |
|---|---|---|
| 1. 3M Company | MMM | 68.67 Billion |
| 2. Tyco International LTD | TYC | 23.15 Billion |
| 3. General Cable Corp. | BGC | 2.51 Billion |
| 4. Corning Inc. | GLW | 33.01 Billion |
- 3M is a diversified technology company with a global presence in: industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services; and electro and communications. The electro and communications segment serves, among other things, telecommunications companies with a wide array of products for fiber-optic and copper-based telecommunications systems for fixed and wireless networks. The electro and communications segment accounted for 11% of 3M's sales in 2010.[1]
- Tyco is a diversified, global company that provides security products and services, fire protection and detection products and services, valves and controls, and electrical and metal products. Part of the electrical and metal products segment designs and manufactures pre-wired armored and metal-clad electrical cable, flexible and non-metallic conduit, and PVC and HDPE cable protection products. The electrical and metal products segment comprises 8% of Tyco's sales for 2010.[2]
- General Cable is a global company that develops, designs, manufactures, markets and distributes copper, aluminum and fiber optic wire and cable products for the energy, industrial, specialty and communications markets.[3]
- Corning is a global, diversified technology company that operates in: display technologies,
telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. The telecommunications segment produces optical fiber and cable, and hardware and equipment products for the worldwide telecommunications industry. The telecommunications segment represented 26% of Corning’s sales for 2010.[4]
- Internationally, PLPC manufactures similar types of products as are sold domestically, sells to similar types of customers and faces similar types of competition - in some cases the same competitors.
Summary
Overall, PLPC is a strong competitor within the markets that it operates. They believe they are the world’s largest manufacturer of formed wire products for energy and communications markets. They believe they maintain a strong market share position in protective closures. The fiber optic closure market is one of the most competitive product areas for PLPC with a number of primary competitors and several smaller niche competitors that compete at all levels in the marketplace. However, they believe that they are one of four leading suppliers of fiber optic closures.[5]
Industry Analysis
Porter's 5 Forces
Rivalry among Existing Firms
Medium - Since PLPC operates in multiple segments, they experience different competition in each segment. They primary experience three points of competition: price, performance, and service. There are a number of primary competitors and several smaller niche competitors that compete at all levels in the marketplace. Domestically, there are several competitors for formed wire products. Although, it has other competitors in many of the countries where it has plants, the formed wire products compete against other pole line hardware products manufactured by other companies. The Company’s data communication competitors range from assemblers of low cost, low quality components, to well-established multinational corporations.
Threat of New Entrants
Medieum - PLPC has nearly 100 domestic and international patents, many of which are on core products. It would be difficult for a new entrant to enter the market and reach a scale that adversely affects Preformed Line Products core business.
Threat of Substitutes
Low - Because the product is quentesential to its users and few alternatives exist to substitute their product the threat of substitutes is low.
Buyer Power
Low - No customer accounts for more than 10% of revenues. If PLPC were to lose a customer it would not have a material impact on revenues and because of PLPC competitive advantages it is unlikely for its customers to pursue competitors.
Supplier Power
Low - Few of Preformed's raw material needs are serviced by sole supplier's. The limited numbers of sole supplier’s do not offer a unique product that PLPC could not receive from alternative suppliers.
Business Analysis
Human Resources
Below is a chart that summarizes some of the key executives and officers at Preformed Line Products Company. Along with their name, included is age, positions held at PLPC, year they started as officer, and total compensation. [6]
Marketing
Product
Preformed Line Products Company operates in four main segments of their business, communications, energy, special industries, and solar energy. Within each of these segments they offer a variety of main product types and solutions. Communications includes: fiber optics, copper products, demarcation products, bonding products, and strand and cable products. Under energy they offer: transmission, both overhead and underground distribution, and fiber optics for energy. For special industries they have: agricultural and arborist solutions, elevator solutions, metal building solutions, tower and antenna solutions, and urethane products. Their solar segment offers: a variety of mounting solutions, enclosure solutions, residential solutions, commercial and industrial solutions, water pumping solutions, lighting solutions, emergency back-up and uninterrupted power solutions, and packaged solar power systems. This list covers some of the main products and solutions PLPC provides, but the company separates their products into five groups when looking at revenue breakdown: Formed Wire and Related Hardware Products, Protective Closures, Data Communication Cabinets, Plastic Products, Other Products. Below is a graph that details the percentage of revenue that comes from each category. [5] Price
Preformed Line Products Company has a variety of raw materials that they use in their products. These include galvanized wire, stainless steel, aluminum covered steel wire, aluminum re-draw rod, plastic resins, glass-filled plastic compounds, neoprene rubbers and aluminum castings. In addition they also use a few other products like fasteners, packaging materials and communications cable. The costs of these raw materials influence the prices of PLPC's products. However it is difficult for them to pass on cost increases into their prices. This means if their is an increase in the raw material prices then the company's profitability may take a hit. In an effort to stabilize some of their costs they use contracts for most plastic resins, and wire and re-draw rod. Another way they control their costs is by using numerous different supplies for some of their products. However they rely solely on one manufacturer other certain raw materials which poses a risk of increasing costs and affecting profitability also. Overall they competitively price their products, and in order to maintain high profitability they use contracts and a variety of supplies for certain raw materials. [5]
Place
PLPC distributes its products on a worldwide basis. Their international and domestic operations are very similar in nature, they sell the same types of products to similar customers and face comparable competition. Their three primary regions of operation are Asia-Pacific region, Europe, Middle East and Africa region, and Americas region. They have wholly- own operations in Australia, Brazil, Canada, China, Great Britain, Indonesia, Malaysia, Mexico, New Zealand, Poland, South Africa, Spain and Thailand. Additionally they export to other markets that they don't have a standing presence in including Bangladesh, Philippines, South Korea, Bolivia, Colombia, Ecuador, Guyana, Surinam, Venezuela, Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Neth. Antilles, St. Lucia, St. Vincent, Trinidad & Tobago, British Virgin Islands, Anquilla, Barbados, Cayman Islands, Dominican Republic, Bahamas, Aruba, Jamaica, Bermuda, and Antiqua. Overall they have many manufacturing facilities all over the globe, and to cover the areas where they lack this physical presence they use a network of qualified representatives, distributors, and export houses.[5] [7]
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Strategy Analysis
Strategy Framework
Nature of Product
- Energy -
- Transmission - Transmission products are the largest growing segment of the overall energy market, largely due to increased US regulation (2005 Energy Policy Act) that has called for increased efficiency in the generation, transmission, and distribution of power. Additional growth has come from the clean energy sector. As this medium continues to grow, so does the need for transmission lines to deliver the power output from remote locations to the power grid. [5]
- Distribution - Distribution products made a recovery from the prior year slump in sales. The decline in distribution products has been driven by a switch from overhead line distribution to underground distribution, and ultimately an aggregate decline in distribution budgets. However, PLP is poised for growth in this segment with a backlog of deferred and delayed maintenance of overhead distribution lines. Additional growth is spurred by the acquisition of Dulmison and its strong presence in the fiber optic market. The fiber optic product line is poised for additional growth specifically driven by US government programs designed to deploy broadband to non-served and under-served areas of the country; grants were awarded in 2010 and are expected to be deployed within the next two years. Aside from federal regulations, municipalities are experiencing strong demand and growth of broadband services as well. [5]
- Communications - The telecommunications and CATV business remained stable in 2010. However, a reduction is business was attributable to independent telephone companies losing wireline telephone customers to wireless technologies. Although, there was a rally in the copper based lines required for DSL internet users. Despite this decline in wireline technologies, it reflects a shift towards more bandwidth intensive applications - prevalent in PLP's fiber optic network product offerings. The primary growth of this line is driven by the adaptation of the fiber optic network at a global level. The biggest growth opportunity lies in Brazil's upcoming need for advanced communication networks during it's hosting of the upcoming World Cup and Olympic Games.[5]
- Solar Energy - Solar energy is and will be a significant growth factor of PLP revenues. Since alternative forms of clean energy are often located in remote locations, PLP products are needed to deliver that energy back to the grid for deployment to the community. [5]
Geographical Diversification
PLP has operations in fourteen countries divided into three geographic regions, of which PLP has a total of sixteen factories.
- Asia-Pacific Region - PLP has been operating in Asia since 1960 with operations in Austrailia, China, Indonesia, Malaysia, New Zealand and Thailand. Expansion in this region has been primarily driven through acquisition; acquiring Dulmison in 2009 and Electropar in 2010. In 2010 the Asia Development Bank recently revised its GDP growth forecast from 7.5% to 8.2% signaling strong growth in the region. [5]
- EMEA - The European, Middle East and Africa region has been experiencing turmoil and slowing GDP growth, but nonetheless, PLP was able to maintain its strong market share throughout that time. With operations in England, Poland, South Africa and Spain the firm implemented a "Continuous Improvement" initiative to foster growth in the region during a tumultuous time. As a part of this initiative PLP continued to invest in its people and products, specifically through the modernization of the Poland plant. Furthermore, the acquisition of Dulmison enabled the region to expand its product offerings to current clients and even expand operations to new clients as well. [5]
- Americas - With operations in Brazil, Mexico, United States and Canada, this region primarily services power utilities, communications and solar energy customers. Growth in 2010 was attributable to growth in the energy business, specifically utility transmission. However, the communications business was relatively anemic as telecommunications and CATV companies scaled back spending. PLP continues to invest in this region, expanding and enhancing the product offering of transmission grids, specifically the fiber optic product lines. Furthermore, it has still yet to be seen whether or not US government stimulus spending will materially impact top line growth through utilizing PLP for infrastructure improvements. [5]
SWOT Analysis
Strengths
- Exclusive Relationships with FOC Manufacturers - PLP maintains close working relationships with the major overhead fiber optic cable manufacturers worldwide. This allows PLP to package its hardware products with the fiber optic cable serving as a complete solution for the customer’s needs. These relationships have been instrumental in winning contracts and developing relationships primarily in Central and South America. [8]
- Well Positioned in the Clean Energy Space - PLP's clean energy market includes residential consumers, commercial businesses, off-grid operators, and utility companies. PLP currently provides hardware solutions, system design and installation services for solar power applications. PLP markets and sells these products and services at various entry points including to end-users, distributors, installers and integrators.
Weaknesses
- Overhead Line Distribution - PLP's product offerings are heavily weighted towards overhead line distribution. The potential shift towards underground distribution lines could bare a significant impact on revenues. [8]
- Unhedged Currency Exposure - Depicted below is the impact currency movements have on Gross Profit. With the changes in the Americas segment, almost 70% of the year over year change in gross profit was attributable to beneficial movements in currency. Highlighted in red is the aggregate impact of currency movements on gross profit of 21%. Given the fact that over 50% of PLP's revenues are derived outside of the US Dollar, fluctuations in the currency market can have a material impact on earnings. Although, past year over year change due to currency movements has been positive, the fact that they represent a material portion of the business can also adversely affect gross profit in the same manner. [8]
Opportunities
- FOC Growth - Fiber Optic Cable growth is driven by the demand for high-speed internet access, broadband entertainment and improved electrical service and reliability through deployment of smart grid technologies. Sales of fiber optic hardware to the utility market increased significantly in 2010. In the US, federal stimulus programs designed to deploy broadband to non-served and under-served areas of the country began awarding grants during 2010. Additionally, Municipalities around the country are building their own fiber based systems to deliver a variety of services to their citizens. PLP expects that this growth will continue as additional projects receive awards and funding driving additional sales.
- Clean Energy Growth - Environmental concerns along with federal, state, and local utility incentives have fueled demand for renewable energy systems including solar, wind, and biofuel. The industry continues to grow rapidly as advancements in technology lead to greater efficiencies which drive down overall system costs. Furthermore, passage of the economic stimulus bill in early 2009 that outlines provisions for upgrading the aging transmission infrastructure and connecting renewable energy sources to the grid should attract new investment to fund new infrastructure projects in the industry. [8]
Threats
- Shift Towards Underground Distribution - Distribution budgets continue to be reduced overall reflecting the continuing lack of new home construction. These budget reductions primarily affect demand for underground distribution products rather than overhead line hardware. However, there has been a shift towards underground distribution products and an increase in underground sales should be seen as new home sales pick up. On the flip side, more funds will be allocated to the deferred repairs to overhead distribution lines. Since PLP’s product offerings are heavily weighted toward overhead and PLP should benefit as budget dollars are shifted from new underground construction to deferred overhead line maintenance.
- Unfavorable Currency Movements - Given the fact that over 50% of revenues are derived from international operations, unfavorable movements in the currency market can materially impact the operations of PLP. Despite favorable movements in 2010 derived from the Australian Dollar, South African Rand and Brazilian Real, the opposite can materially detract from gross profit. As evidenced in the comparisons of the USD relative to each currency in 2011, there is significant volatility that potentially effect operations of the business.
Financial Analysis
Profitability
Profitability is driven by: 1) Margins, 2) Turnover and 3) Leverage.
The overall trend has been very constant for the past eight years. Margins, turnover and leverage have all finished near their recent highs with have helped profitability the last couple of years.
The company is expecting geographical expansion and further penetration of their product line to continue sustain their profitability going forward.
Note on ROCE: ROCE was able to outperform ROA because leverage has increased after the company’s acquisitions.
Margins
Margins have fluctuated little since 2003. This is a very impressive feat considering the recent global recession. This shows that that their product is in high demand and they have a reasonable amount of pricing power. Their entire industry is growing (especially in emerging markets) which allows them to keep a steady profit margin while at the same time growing revenues.
Turnover
The company's turnover has been generally increasing over the past 10 years. Total asset turnover has increased from 1.1 in 2011 to 1.3 in 2010. Fixed Assets has been fueling the majority of this move. Fixed Asset Turnover has increased from 3.3 in 2002 to 4.7 in 2010. Current assets have also benefited a little - increasing to 2.2 from 2.1.
Efficiency
PLPC, as measured by their Cash Conversion Cycle, has been becoming more efficient over the years. In 2002, PLPC required 142 days of short term financing this has now shrunk to 125 days. The major driver of CCC has been their Days Inventory and Days Receivables. Both of these metrics have been decreasing except for a slight up-tick in 2009. This is easily explainable by the recession - people bought less goods thus increasing inventory and took longer to pay down debt thus increasing receivables. Days Accounts Payable has been steadily increasing from 27 in 2002 to 33 in 2010. This means PLPC is better using their suppliers for short term financing.
Solvency And Leverage
Solvency Looking at the chart on the right, you can see that PLPC's solvency position has not fluctuated very much over the last 10 years. The heat map gives you an idea of how the metrics have trended overtime. Although the solvency metrics have trended downwards in recent years, they are still well within safe operating limits.
Leverage The company has become more leveraged in recent years. You can see this in Asset to Equity increasing from 1.3 to 1.41, Liabilities to Assets increasing from .23 to .29 and Liabilities to Equity increasing from .3 to .41. The leverage ratios are still very low and in two cases lower than one - this signifies a very stable company and they are not at risk of default.
Competitors
Profitability
The company's dividend yield is 1.1% compared to .95% to 2.2% for its competitors. Generally, their profitably ranks 3rd compared with all of its competitors. PLPC's ROA is 8.8% compared to 15% for GLW and 14.5% for MMM. The reason for their lower profitability is that they sell to the utility market while GLW and MMM sells to a more specialized product base.
Solvency and Liquidity
PLPC's solvency is third compared to its competitors. Regardless of the absolute numbers, they are solvent and they don't have to worry about short term payments. They are also less leveraged than the majority of their peers.
Valuation
PLPC is relatively undervalued compared to its competitors. The most likely reason for this is that they do not have any analysts covering the company. The company can also be considered more risky because they are a small cap company and only have a limited product line. If the company was covered by more analysts and the revenue stream was part of a larger company then they would probably be valued higher.
References
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