In fiscal 2012, the industrial packaging, printing papers and consumer packaging business segments’ contributed 55%, 31% and 12%, respectively, to EBITDA.
In comparison, Boise Inc. (NYSE:BZ) is primarily U.S. focused, as the third largest producer of un-coated freesheet in North America. It’s claimed an estimated 15% of market share in the pressure-sensitive market in the region. Boise is also less diversified in terms of business segments, deriving half of its fiscal 2012 EBITDA from paper, and the other half from packaging.
Domtar Corp (USA) (NYSE:UFS) designs, manufactures, markets and distributes a range of fiber-based products, including communication papers, specialty and packaging papers and adult incontinence products.
Neenah Paper is valued at similar levels to its peers using forward P/E and trailing- twelve-months EV/EBITDA metrics, despite boasting of a significantly higher ROA. Neenah Paper trades at a forward P/E of 10.7 and a trailing-twelve-months EV/EBITDA of 6.8.
In comparison, Boise and Domatar are valued by the market at 11-to-12 times forward P/E and five-to-six times EV/EBITDA.
International Paper Company (NYSE:IP) also trades at a similar forward P/E of 12, but has a slightly higher EV/EBITDA of 9.3 compared with the other stocks in the peer group.
Neenah Paper, however, deserves to trade at a premium valuation multiple, in my opinion, by virtue of its higher ROA of 6.5%. Comparatively, its peers delivered ROAs of 2%-to-3% for the last twelve months.
Both Neenah Paper and Domtar lead the group with a dividend yield of 2.3%. Neenah Paper is moderately geared with a gross debt-to-equity ratio of 90%, trumping Boise and International Paper Company (NYSE:IP) which have gearing ratios exceeding 100%.
Domtar has the strongest balance sheet of the four companies, with a gearing ratio of 42%.
Capital allocation
Neenah Paper has a decent capital return policy, supported by strong free cash flows. It has paid dividends in every single year since 2005 and currently sports a dividend yield of 2.3%.
It is also authorized to purchase up to $10 million of its stock annually. Neenah Paper achieved positive free cash flow for four consecutive years from 2009-to-2012, and has moderate capital expenditure needs, estimated at $10 million per year based on historical financials.
Conclusion
Investors typically group stocks in the industry together and assign similar valuations without differentiating between them. Neenah Paper’s undervaluation potentially falls under this scenario, as most of its direct competitors are unlisted.
Upon examination of Neenah Paper’s financial metrics, such as margins and ROA, however, it is easy to understand why it should command a higher valuation.
The article Buy This High-End Paper Company at Low-End Valuations originally appeared on Fool.com and is written by Mark Lin.
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