Conservative capital structure and a reasonable valuation
Tredegar Corporation (NYSE:TG) operates in two main business segments: Film Products and Aluminum Extrusions. Most of its revenue, $611.9 million, or 71.4% of the total revenue, was generated from the Film Products segment while the Aluminum Extrusions segment contributed $245.5 million in 2012 revenue. The Film Products segment had a much higher operating margin of 11.4% while the Aluminum Extrusions segment’s operating margin was only 3.7%. The biggest customer of Tredegar Corporation (NYSE:TG) is The Procter & Gamble Company (NYSE:PG), accounting for around $264 million in 2012 sales. The company reported that P&G and Tredegar have enjoyed a good long-term relationship based on product innovation, process improvement, and cooperation.
What I like about Tredegar is its conservative capital structure. As of March 2013, it had nearly $380 million in equity, $38 million in cash, and only $118 million in debt. Thus, the net debt stayed at only $80 million. Looking forward, Mario Gabelli expects that its revenue could reach more than $1 billion in 2014 while EBITDA might grow from $103 million to $132 million in 2015.
Tredegar Corporation (NYSE:TG) might earn $1.40 per share in 2013 and $2.00 in 2015. The market values Tredegar at nearly 8.2 times its EV/EBITDA. EV/EBITDA stands for Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization. This valuation ratio reflects the relationship between the market value, adjusted with cash and debt of the company, and its cash flow position.
Highest dividend yield but high payout ratio
Compared to peers AEP Industries (NASDAQ:AEPI) and , Tredegar Corporation (NYSE:TG) has a bit higher valuation. AEP, at $66.20 per share, is worth more than $366.4 million on the market. The market values AEP the cheapest at only 7.5 times its EV/EBITDA. Recently, AEP Industries (NASDAQ:AEPI)’s share price dropped significantly, from around $83 per share to only $66.20 per share after the company released disappointing quarterly results and outlook.
Looking forward, the company estimates that the business volume might stay flat in 2013, lower than the previous forecast of 3% growth. As the company had experienced extremely significant gains in the period of January 2012-May 2013, I personally think that the market might keep pushing AEP lower in the near future.
Griffon Corporation (NYSE:GFF) has a bit higher valuation than AEP Industries (NASDAQ:AEPI). It is trading at around $11 per share with a total market cap of $597 million. The market values Griffon Corporation (NYSE:GFF) at around 8.12 times EV/EBITDA. Griffon currently has three main businesses: Telephonics, Home & Building Products, and Clopay Plastic Products Company. Most of its adjusted EBITDA, $72 million, or 40% of the total adjusted EBITDA, was derived from Home & Building Products, while Clopay Plastic Products and Telephonics generated $44 million and $61 million, respectively, in adjusted EBITDA.
Looking forward, the overall improvement in the economy and the housing market would drive Griffon Corporation (NYSE:GFF)’s Home & Building Products. The Clopay Plastic Products segment would be driven by the increasing demand in Latin American and Asian markets while Telephonics would witness rising global demand for ISR products, offsetting the shift in the Department of Defense budget. Consequently, the margin of the Telephonics segment is expected to be strong.
Among the three, Tredegar pays the highest dividend yield of 1.10%. Griffon ranked second with a 0.90% dividend yield while AEP Industries (NASDAQ:AEPI) has not paid any dividend yet. However, Griffon Corporation (NYSE:GFF)’s payout ratio was only 43% while Tredegar Corporation (NYSE:TG) pays dividends more than earns during the year with a payout ratio of 107%.
My Foolish take
Tredegar could be a nice acquisition target with its conservative capital structure and a reasonable valuation. If its EBITDA could increase to $132 million in 2015, a simple EV multiple of 8 would value Tredegar Corporation (NYSE:TG) at more than $1 billion, which is almost a 30% premium to its current trading price. I also like Griffon Corporation (NYSE:GFF) with its much more conservative dividend payout ratio and lower valuation.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article This Stock Has Huge Upside Potential originally appeared on Fool.com.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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