The market is valuing premium paper company Neenah Paper, Inc. (NYSE:NP) at the same level as other packaging and paper-products companies with lower margins and ROAs.
With an ROA of 6%, double that of its paper-products peers, Neenah Paper, Inc. (NYSE:NP) is significantly undervalued with a forward P/E of 11 and an EV/EBITDA ratio of seven. In addition, it has delivered increasing margins and positive free cash flow for the past four years.
Headquartered in Alpharetta, Georgia, Neenah Paper, Inc. (NYSE:NP) is a leader in premium image and performance-based products. It’s organized into two business segments: a specialty, performance-based, technical products business and a premium fine papers business.
The technical products business deals with specialty, performance-based products and serves end markets such as filtration, industrial backings, labels, and other specialties. The fine paper business is focused on high-end textured and colored graphic papers, and supplies to end markets in the areas of premium print communications, luxury packaging, crafting and premium labels.
Moats that matter
For Neenah Paper, Inc. (NYSE:NP)’s technical products business, the qualification process with such customers as 3M Co (NYSE:MMM), Mahle, Saint-Gobain and Avery Dennison Corp (NYSE:AVY) serves as a strong barrier to entry. New entrants will have to go through an arduous process of qualification with customers — without any certainty of success — before they even earn the right to compete with Neenah Paper.
Furthermore, Neenah Paper, Inc. (NYSE:NP) enjoys a significant advantage over its peers and potential entrants as a result of long-term intimate customer relationships. This has also led to joint product development with its customers, which further strengthens Neenah Paper, Inc. (NYSE:NP)’s competitive position.
In its fine paper business, Neenah Paper’s products have strong brand recognition by printers and designers. This is reflected in its market leadership in the premium fine papers with an estimated market share of 60%, double that of its nearest competitor Mohawk Fine Papers, according to management estimates during the company’s most recent 4Q12 Earnings Conference Call.
Growth drivers
Filtration is the focal point of growth for Neenah Paper’s technical products division, with opportunities to expand into new geographic areas and profitable adjacent markets. The premium-paper company has traditionally focused on the European transportation filtration market, but considers the area of specialty filtration media as a potential new market.
For its fine paper business, Neenah acquired leading business paper brands from Southworth in January to penetrate the specialty-retail paper market segment. Until recently, stationery has been an unexplored area for Neenah Paper.
Peer comparison
Neenah Paper’s peers include Boise Inc. (NYSE:BZ), Domtar Corp (USA) (NYSE:UFS) and International Paper Company (NYSE:IP).
Of the four stocks, International Paper Company (NYSE:IP) is the most diversified in terms of geographical and customer segment exposure. International Paper Company (NYSE:IP) generated 75% of its fiscal 2012 EBITDA from North America, with Europe, Russia and Brazil contributing 8% each.
