Nierenberg Investment on Houston Wire and Cable: Firm is “frustrated” gap between intrinsic value and market value has “widened substantially.”

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On Dec. 23, Nierenberg Investment filed a 13D/A on Houston Wire and Cable (HWCC). The investment adviser expressed frustration that the market value of its long-held position in the micro-cap has “widened substantially over the last two years.”

The filing amended a 13D from Dec.17 of 2018 in which the investment adviser disclosed a 9.99% stake in the electrical wire and equipment supplier.

David Nierenberg, who formed his Camas, Oregon-based firm in 1995, had this to say in the recent filing:

We are frustrated that the gap between HWCC’s market and intrinsic value persists and that it has widened substantially during the past two years.  During 2019, while the stock market has risen broadly, HWCC’s share price has fallen 21%, after dropping 30% in 2018.The only things which the investing public has witnessed to close that gap are that insiders have acquired a substantial number of shares and the company repurchased 1.4% of shares in the third quarter.  While we are delighted with the frequency and size of the insider buys, those actions have failed to move the dial.  That’s not our verdict; it’s the market’s.

Nierenberg first disclosed a 5% stake in HWCC back in Sept. of 2014, when the stock was trading around $12.

Houston Wire and Cable weekly since 2014.

Houston Wire & Cable provides a wide range of specialty wire and cabling to other electrical distributors, as well as value-added services. About half of HWCC’s sales are related to the oil and gas sector. Over the last several years, Houston Wire has been hurt by weak demand in that sector.

  Revenue Net Income EPS
TTM 343,905 4,834 0.29
12/31/18 356,858 8,636 0.53
12/31/17 317,697 -222 -0.01
12/31/16 261,644 -6,006 -0.37
12/31/15 308,133 2,044 0.12

Nierenberg Investment: HWCC’s current tangible book value is $4.30 per share.

What is the intrinsic value of HWCC referenced by Nierenberg in the 13D/A filing? A year ago in a letter to management, Nierenberg calculated a present value of $11.73 for HWCC. Back then he saw an opportunity for the shares to quadruple over time “through free cash flow, shrewd asset monetization, and (stock) repurchase. Nierenberg wrote that “the insiders have not been stupid buying so many shares in the past 16 months.”

In Houston Wire’s Q3 2019 earnings call, Damon Benedict of Nierenberg Investment said:

…by my math your quarter ending tangible book value is $4.30 per share. And as I look at small and micro-cap equity universe, it’s pretty hard to find good companies with solid histories of profitability well run and executing well at a discount to tangible book. So looking at that on the downside support and the potential for $1 in earning power again at some point with the $4 stock we like our investment odds here. 

A year ago, David Nierenberg saw “little reason for Houston Cable to be a public company.”

As David Nierenberg noted, HWCC insiders have been buying their own shares over the last couple years. Since August of 2017, HWCC officers and directors have bought 347,000 shares on the open market, spending $2.2 million, for an average cost of about $6.38.

HWCC has also been repurchasing shares. In the Q3 call, CEO Jim Pokluda said:

At the end of the quarter, we had $20.3 million in available (repurchase) capacity. During the third quarter, we repurchased $1.1 million of stock or 235,000 shares. This represents 1.4% of the shares outstanding. Currently, the program has $8.1 million available to repurchase outstanding shares of common stock from time to time depending on market conditions, trading activity, business conditions and other factors.

A year ago, Nierenberg said he saw little reason for HWCC to be a public company.

“…HWCC’s average daily trading volume, only $229,000 as of December 14, 2018, does not facilitate meaningful or easy liquidity. The frictional cost to trade shares is relatively high. At this moment no brokerage firm or investment bank writes about the company. Given the economics of brokerage and investment banking, that is hard to change.”

Twelve months after suggesting HWCC should be a private company, Nierenberg Investment filed a 13D/A on Houston Wire and Cable. The company’s stock price has continued to decrease, and David Nierenberg’s frustration with HWCC has grown.

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