General Cable (BGC) finds itself caught in a squeeze. Copper, the biggest cost in the company’s traditional cable business, has soared in price thanks to increased demand from China, but demand for the company’s cable products is still so soft that General Cable can’t raise prices to offset its increased costs.
So on February 11 General Cable reported that while fourth quarter 2009 earnings matched Wall Street projections of 24 cents a share and revenues actually came in above expectations at $1.13 billion (versus a projected $1.07 billion), earnings for the first quarter of 2010 would fall between a loss of 15 cents a share and a profit of five cents a share. Wall Street had been expecting earnings of 37 cents a share. Revenue, the company projects will fall between $1.15 billion and $1.2 billion.
Since that revenue number would be above the $1.1 billion Wall Street analysts had projected, it’s clear where the problem is—pricing.
Utility spending in the United States and in much of Europe, especially in Spain (which had been a big customer before the global economic crisis thanks to the Spanish building boom and an aggressive build-out of infrastructure by Spanish utilities) continues to show weakness. That’s led to intense price competition, especially in Europe, as companies fight for what business there is in order to keep their factories running. In the third quarter, General Cable reported that capacity utilization was 40% to 70%.
Operating margin in the fourth quarter was just 2.8%. That was down from 5.1% in the fourth quarter of 2008.
The company continues to be cash flow positive (before items) and has successfully restructured some of its convertible debt, extending its maturities in the process.
I think General Cable faces a long slog until the economies of the developed world recover enough for utilities to resume their grid modernization programs, but that modernization will come and General Cable will be around when the turn arrives.
I wouldn’t rush to buy shares on weakness—yet.
Full disclosure: I own shares of General Cable.