Boy, Could Boise Start Booming!
By Hilary Kramer, GameChangers
Operating throughout North America and Europe, Boise’s packaging segment sells linerboard (which creates corrugated board), corrugated containers (used in food and beverage packaging), and other consumer and industrial goods.
Of its two operating segments, Boise’s packaging department is the most leveraged to growing economies and has better long-term prospects. Paper demand is relatively stable, but some segments are in long-term decline as more information is stored electronically. Approximately 55% of the company’s EBITDA (earnings before tax and interest) contribution comes from the paper segment, and 45% comes from the packaging segment.
Management wants to increase its exposure to packaging further, and this initiative is a main catalyst for the stock going forward. The company has already begun efforts to expand, buying two major packaging companies in 2011. These deals helped to expand BZ’s packaging capacity and will aid in management’s goal of growing the segment.
BZ has a strong growth history, and has been profitable in each of its first three full years since becoming an independent public company in 2008 — even earning 22 cents per share on an operational basis in the recession year of 2009, before EPS jumped to 92 cents with the improved economy in 2010. While volume and pricing remained firm in 2011, higher input costs in the paper business caused EPS to decline to 75 cents that year.
With a better economy and greater integration of the packaging division, the company should be able to earn 80 cents a share in 2013. I also really like that the company’s free cash flow is very strong, with depreciation far exceeding capital expenditures in recent years. This strong free cash flow has enabled Boise to fund its acquisitions, pay special dividends, and pare down its debt. BZ is also a lean operator, with adjusted EBITDA margins in excess of 15%. If we ever see GDP rise consistently at a 3% rate for a few years, the company’s efficiency will allow much of the incremental sales fall to the bottom line.
Despite a rally during the past year, the stock still trades at an attractive valuation that does not fully discount the potential earnings improvement from its internal initiatives and a better economy. Any gains in the stock will be enhanced along the way by potential payments of special dividends.
Hilary Kramer holds BZ in her Breakout Stocks Under $10 portfolio.