Insteel (IIIN)

Steel wire manufacturer Insteel (NYSE:IIIN) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 26.1% year on year to $160.7 million. Its GAAP profit of $0.52 per share was 92.6% above analysts’ consensus estimates.

Company Overview

Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE:IIIN) provides steel wire reinforcing products for concrete.

Commercial building products companies, which often serve more complicated projects, can supplement their core business with higher-margin installation and consulting services revenues. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of commercial building products companies.

Other companies offering reinforcement products for the construction market include Nucor (NYSE:NUE), Commercial Metals (NYSE:CMC), and Gerdau (NYSE:GGB).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Insteel grew its sales at a tepid 4.8% compounded annual growth rate. This was below our standard for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Insteel’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 13.4% annually. Insteel isn’t alone in its struggles as the Commercial Building Products industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Insteel reported robust year-on-year revenue growth of 26.1%, and its $160.7 million of revenue topped Wall Street estimates by 7.2%.

Looking ahead, sell-side analysts expect revenue to grow 12.9% over the next 12 months, an improvement versus the last two years. This projection is healthy and implies its newer products and services will catalyze better top-line performance.

Insteel has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16% gross margin over the last five years. Said differently, Insteel had to pay a chunky $84.04 to its suppliers for every $100 in revenue.

Insteel produced a 15.3% gross profit margin in Q1, up 2.9 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Insteel has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.8%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Insteel’s operating margin decreased by 4.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Insteel generated an operating profit margin of 8.5%, up 2.4 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Insteel’s EPS grew at an astounding 32.9% compounded annual growth rate over the last five years, higher than its 4.8% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Insteel, its two-year annual EPS declines of 46.3% mark a reversal from its (seemingly) healthy five-year trend. We hope Insteel can return to earnings growth in the future.

In Q1, Insteel reported EPS at $0.52, up from $0.35 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Insteel’s full-year EPS of $1.16 to grow 69%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Insteel has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.3% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Insteel’s margin dropped by 1.6 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Insteel burned through $5.54 million of cash in Q1, equivalent to a negative 3.5% margin. The company’s cash burn was similar to its $580,000 of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Insteel hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 21.4%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Insteel’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Insteel is a profitable, well-capitalized company with $28.42 million of cash and no debt. This position is 5.5% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Insteel blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid quarter. The stock traded up 4.9% to $28 immediately following the results.

Updated: May 22, 2025 at 11:20 PM EDT

Before making an investment decision, investors should account for Insteel’s business fundamentals and valuation in addition to what happened in the latest quarter.

Insteel falls short of our quality standards. To kick things off, its revenue growth was uninspiring over the last five years. And while its astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining operating margin shows the business has become less efficient.

Insteel’s P/E ratio based on the next 12 months is 18.2x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $39 on the company (compared to the current share price of $35.62).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.