To The Moon

$Prysmian S.P.A.(PRYMF)$

Introduction

At times, I find myself overlooking the most obvious investment opportunities. We've discussed numerous megatrends on this channel, like AI, cloud storage, infrastructure development, and the energy transition. However, until now, I never quite connected the dots. There's one seemingly boring product, which we all know, yet it's absolutely vital for all of these trends. I would even argue that, at this point, it's more critical than Nvidia's chips or ASML's EUV machines. I'm talking about cables—optical cables, copper cables, and most importantly, the specialty of today's company, Prism: underground and subsea cables.

We live in a connected world where power needs to be distributed across continents, and data flows between different parts of the globe. In this video, I’ll break down what Prism does, take a look at their financials and valuation, and explore whether now is the right time to invest long-term in this incredibly essential company.

Performance

Prism has outperformed the S&P 500 nearly three times, delivering a 62% return compared to the S&P’s 24%. This indicates that their products and business are currently drawing significant investor interest. Over the past 10 years, the gap isn't as wide, but Prism still outperformed the S&P 500, delivering a total return of 396%, compared to the S&P’s 250%. When we compare Prism to the more relevant Euro 50 and Euro 600 indices, the outperformance becomes even more striking, with Prism outperforming both indices by nearly ten times.

But how exactly does Prism achieve this impressive long-term success?

Prism is the global leader in high-performance cables for energy transmission, telecommunications, and industrial applications. Based in Milan, Italy, the company operates in over 50 countries, serving industries like energy infrastructure and digital communications. Prism specializes in high-tech underground and subsea cables, the backbone of global data transmission. These are the cables that run under the oceans, connecting continents, and powering the electrical grids of countries.

Such cables are far more complex and expensive to produce, install, and maintain than standard cables, giving Prism a unique advantage. Positioned at the heart of global trends like the energy transition, electrification, and digital transformation, Prism is in an ideal position to benefit from these structural shifts.

What makes it even more compelling is that they recently reorganized their structure to align better with these trends. In 2024, they moved from three divisions to four: Transmission, Power Grids, Electrification, and Digital Transformation. The goal is to transition from a traditional cable manufacturer to a full-service cable solutions provider. They don’t just sell cables—they offer a one-stop solution that includes installation, monitoring, and infrastructure maintenance.

To further enhance their capabilities, Prism operates a fleet of five cable-laying ships, including the world’s two most advanced vessels, the Leonardo da Vinci and the newly acquired Mona Lisa. The company is expanding this fleet and is uniquely equipped to handle underwater and underground cable installation and maintenance. With over 140 years of experience, Prism guarantees repair and recovery times that are 70% faster than competitors.

Given the increasing threats to undersea infrastructure, their ability to make quick repairs is becoming more crucial. As more cables are installed, the demand for maintenance only grows.

Despite being an Italian company that many people may not be familiar with, Prism is a key player in this niche global industry. In their most recent fiscal year, Prism generated the majority of its revenue (54%) from the Electrification segment, followed by 22% from Power Grids, 14% from Transmission, and 10% from Digital Solutions.

They are currently focused on expanding their presence in the U.S., and one of the catalysts that could drive their stock even higher is their recent acquisition of U.S.-based competitor CorWire, which strengthens their footprint and product portfolio. This isn’t the first acquisition in the U.S.—they bought competitor General Cables in 2018.

Prism’s strategy is clear: expand, diversify, and eliminate competitors. The company is showing no signs of slowing down. In their latest earnings call, CEO Massimo Motini shared that they’re considering acquiring their rival Nexans, and just a few weeks ago, they announced plans for a potential dual listing on the New York Stock Exchange. This move could significantly increase the visibility of the stock and attract new attention from investors.

Market Sentiment

These are still rumors, and nothing has been decided yet. However, what’s not up for debate are the broader trends driving growth in this market. The key factors include the expansion of renewables and the ongoing trend toward electrification, both of which place significant strain on current energy infrastructure. Specifically, the growth of offshore wind farms is expected to increase the demand for undersea power cables. Meanwhile, this upgrade of energy infrastructure is also necessary on land. Prism anticipates that investments in power grids will triple in the coming years. Additionally, the continued need for high-speed internet is driving the demand for advanced optical cables.

Overall, the submarine cable market is projected to grow at over 6% annually, while the underground cable market is expected to grow even faster, at 7.7%. While these growth rates might not sound overly exciting at first, they indicate that Prism operates in a steadily growing sector. These trends aren't short-lived; they're expected to continue for many years.

Moat

As I mentioned earlier, Prism holds a very strong position in this market, with the potential to further increase its market share thanks to its established presence and recent acquisitions. This is also due to the high capital requirements in the industry, which make it difficult for new competitors to enter the market. Furthermore, long-term operation and maintenance contracts, particularly for undersea cables, make it hard for customers to switch manufacturers. The company’s clientele, including telecom, utility, and big tech firms—many of the largest corporations globally—gives Prism significant pricing power.

I believe Prism maintains a solid moat, and their recent shift toward becoming a full-service solution provider, rather than just a cable manufacturer, can help strengthen customer loyalty and create a recurring revenue stream. Now, speaking of revenue, how did the company perform financially?

Financial Analysis

How has the company performed financially over the past few years? While there’s some seasonality and fluctuation in their revenue, EBITDA, and free cash flow, the overall trend for these metrics is consistently upward. Free cash flow, in particular, can appear irregular, especially in the first quarter, where it's usually negative. This is due to seasonal factors such as harsh weather, customer payment cycles, and preparations for the busier summer months in terms of inventory and materials. However, the long-term, year-over-year trend is undeniably positive.

Looking at the past five years, the company has managed to grow revenue by 6.9% annually, free cash flow by 10.7%, and earnings per share (EPS) by 27.3%. While this growth includes both organic expansion and acquisitions, it’s still impressive.

What stands out to me is the consistent growth in the company’s backlog. As reported last summer, their backlog has been increasing dramatically over the past three to four years. This means the company is receiving more orders than it can currently fulfill, which is helping to drive sales and contributing to organic growth alongside their acquisitions.

The company has also managed to maintain or even improve its profitability in recent years. For instance, their free cash flow yield is currently at an impressive 5.2%, their EBITDA margin stands at 8.9%, and their return on invested capital (ROIC) is 8.4%. While these figures are somewhat below the average industrial sector margins, there are several reasons for this. Primarily, the company is heavily investing in R&D, especially for high-tech and optical cables. Additionally, the cable manufacturing industry itself is marked by high material costs and intense competition, which drives price pressure.

Their balance sheet remains in decent shape, although we can see the effects of their recent acquisition. The net debt-to-EBITDA ratio, which had been decreasing for years, has now risen significantly. While they haven’t repurchased shares yet, they’ve also avoided significantly diluting shareholders until recently. Last year, they issued new shares to finance the acquisition of Encore, which increased their debt-to-EBITDA ratio to 3.4 times. This is slightly above my usual threshold of three times, but I believe this is temporary. The company has shown a disciplined approach to cash allocation in the past, and I expect this ratio to decrease over time, unless further acquisitions take place.

S&P Global currently gives the company a credit rating of BBB-, which is still investment grade, albeit just barely. In their most recent annual report, the company indicated that to support their backlog and further growth, capital expenditures (CAPEX) over the next five years are expected to double compared to the past three years. This increase in CAPEX raises the possibility that the company may not be able to pay down its debt as quickly as it has in the past.

Despite this, the company continues to pay a dividend, with a current yield of just over 1%. The dividend growth has been impressive, averaging 10.2% per year over the last five years, and with a low cash flow payout ratio of only 21%, there's significant room for future growth if the company chooses to increase dividends. However, despite this strong growth, the dividend yield has steadily declined over the past five years, highlighting the excellent stock performance during this period.

Valuation

The company’s valuation currently suggests that it might not be the most affordable option. In fact, it is priced above the sector median across all metrics. The PE ratio is at 34, which is about 33% higher than the sector median of 25. The EV to EBITDA ratio stands at 13.4, compared to the median of 12. However, the price-to-cash-flow ratio is relatively lower, at 10, compared to the median of 14.4, indicating that the company is a strong cash flow generator. The P/E ratio, which also considers future EPS growth, is 4.1, well above the industry median, meaning investors are paying a premium for the company’s market tailwinds and strong position.

Market Forecast

Looking ahead, the expectations for the company are mixed. Among the 17 analysts providing a one-year price target, opinions vary significantly. The average price target shows a modest increase, but the most optimistic analyst anticipates a 33% upside, while the most pessimistic expects a decline of over 50%. However, EPS growth is projected at a compound annual growth rate (CAGR) of 21% until 2027, with revenue growing at 6.4%, slightly lower than its historical growth rates.

Peer Comparison

Before summarizing, let’s compare Prism to its competitors. If you enjoy this video, please consider liking and subscribing to support the channel. I know this video may not be as widely viewed because Prism is a lesser-known company compared to giants like Nvidia, so your support is truly appreciated!

For the peer comparison, I’ve chosen Nexans, the potential acquisition target of Prism, Sumitomo Electric, Furukawa, and Belden. In terms of total returns, Furukawa led the pack with 480% total returns. Prism, with nearly 400%, came in second. When it comes to dividend payments, Sumitomo and Nexans are the best, offering yields of 3% and 2.6%, respectively. Furukawa and Nexans also have the fastest-growing dividends, with Furukawa’s growing by nearly 60% and Nexans’ by 15%. However, it's worth noting that Furukawa had previously cut its dividend before reinstating it in 2022.

Valuation-wise, Prism stands out as the most expensive compared to its peers, with the highest PE ratio and, together with Furukawa, the highest EV/EBITDA ratio. Its price-to-cash-flow ratio is closer to the middle of the pack. However, in terms of long-term growth—looking at three-year and five-year revenue, EBITDA, and cash flow growth—Prism ranks among the top performers in this group, alongside Furukawa.

Conclusion

Overall, I believe the company has significant potential. Despite its somewhat "boring" business of cables, it's a crucial industry benefiting from several global megatrends, which should support sustained growth over the years or even decades. I also appreciate the management’s focus on rewarding investors through dividends, with consistent double-digit growth in the past.

That being said, I do think the current valuation is on the higher side, and it might be worth waiting for a better entry point. While the company does have a strong moat and strategic position, it operates in a competitive and capital-intensive market. If that doesn’t deter you, it could be a great investment, especially for long-term investors seeking high dividend growth like myself. However, in the short term, I wouldn’t rule out the possibility of a correction. It may not necessarily be a crash; the stock could simply trade sideways, as most analysts expect for this year. However, any news regarding a dual listing in New York or a new acquisition could change the trajectory quickly. This is just my perspective.

 @Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.