Company background:
Winpak(WPK-T) is in the business in manufacturing high quality
packaging materials and the production of related innovative packaging
machines. Winpak distributes products to customers primarily in North America
for the protection of perishable foods, beverages and in health care
applications. Winpak is closely aligned with Wipak, which is one of Europe’s
leading manufacturers of packaging materials. Wihuri Oy of Finland is the
controlling shareholder of Wipak and Winpak.
Winpak integrates the whole production process of its
products from getting the raw materials to delivering the end product to
customer. Winpak can react quickly to market requirements and can readily
design materials that respond to a customer’s special needs. This core
competency is supported by a technical organization with its engineering
expertise and low cost manufacturing through the use of advanced technology.
Company performance:
Dividend yield: 0.81%
Return on Equity: 14.6%
Median Return on Equity (last 5 years): 11.5%
Net debt to total equity: 0
5 year compound return on stock price: 17% per year
10 year compound return on stock price: 3% per year
Winpak stock price increased 204% or 17% per year over the past 5 years. Over the past 10 years, the stock returned 23%
or 3% per year. Compound growth of EPS was 22% per year and 9% per year over
the past 5 and 10 year period. Expectation was high on the stock back in 2002
and the average PE was 22 times earnings back then, investors got disappointed
and the stock sold off and reached a bottom average PE of 11 to 12 times in 2008-2009. The stock rallied strongly off the bottom from 2009 to 2012 when EPS grew
nicely due to improving profit margins and modest sales growth.
Compound growth rate of sales was 7% and 8% in the 5 year
period and 10 year period. Compound growth rate of EPS in the last 5 year and
10 year period was 22% and 9%. Winpak is targeting to grow its revenue to over 1 billion by 2015. This represents a higher compound revenue growth rate compare to the previous 5 and 10 year period.
EPS has been growing faster than the growth rate
of sales in the last 5 years due to the company’s effort to increase the profit margin of the business, in fact
EBIT margin almost doubled from 6.85% in 2007 to 14.66% in 2011. Winpak’s
profit margin is one of its strength and it is among the group of companies with
the highest margins in the industry.Significant growth in profit margins might not be possible for the next 5 years but profit margins can be improved with enhanced production efficiency. Return on equity was 7.4% in 2007 and it doubled to 14.6% in
2011. Decent ROE ratio shows the quality of the management team in delivering
growth and efficiency gains.
The ability to generate cash is one of the strength of the
business. Record operating cash flow in 2011 is the result of high profit
margins and modest sales growth. Winpak focus on its organic growth
opportunities and spent a record $48.9 million on capital expenditure in 2011. Cap
ex in the last 3 years was $21.4 million, $39 million and $48.9 million, this
all covered by the operating cash flow of the company. The company was
increasing its cash balance on the balance sheet in the last 4 years and the
cash balance covers all the liabilities according to the latest quarterly report.
The dividend yield on the stock is low @0.81%. Although the
company was growing at a modest rate over the last 5 and 10 year period, the
dividend was not increased for over 10 years. The operating cash flow of the
company is more than enough to cover all the capital expenditure and the
dividend but the company’s priority is to grow the business instead of
returning cash to shareholders.
Major shareholder:
Antti Aarnio-Wihuri of Finland holds 52% of the shares of
Winpak as per INK company insider report. Winpak is closely aligned with Wipak,
which is one of Europe’s leading manufacturers of packaging materials and is
ultimately controlled by Wihuri Oy of Finland. Antti Aarnio-Wihuri is the controlling
shareholder of Winpak, Wipak & Wihuri Oy and he is the board chairman of
Winpak since May 18 1985.
Recent analyst downgrade:
Two analysts cover the stock as per Reuters with 1 buy rating and 1 outperform rating. Earnings missed
analyst estimate in the last 2 quarters by -12.3% and -8.8% . In the past 90 days analyst downgraded EPS
estimate of 2013 by -5.8% and price target was revised downward by -3.2%.
Valuation:
PE ratio (trailing 12 months): 14.3 times
Median average PE (last 5 years): 12.10
Price to book value ratio: 2 times
Median average price to book value ratio (last 5 years):
1.46
Price to cash flow ratio: 9.9 times
Winpak’s trailing 12 month PE ratio and price to book ratio
are above the median values of the last 5 years. The company have reported
record sales and EPS for 5 consecutive years and this is priced into the current
stock price. The company seems to be fairly priced @ 12 times forward earnings,
valuation is above peer average but the performance of Winpak is also superior.
The company’s cash and cash equivalents balance at the end
of third quarter 2012 is $120.3 million. There is no long term debt and the
cash on hand is enough to cover all the liabilities stated on the balance
sheet. According to the annual information form “With the amount of cash on
hand, existing term loan facility, an informal investment grade credit rating
and the company’s ability to generate positive cash flow from operations, the
company is in a good position to fund an acquisition if needed”. The valuation
of the company’s share is above peer average and this increase the chance of
Winpak in making an accretive acquisition. However, the management team of
Winpak is conservative and they made two acquisitions only over the last 10
years (2002 &2008). The chances of Winpak making an accretive acquisition might
be low due to its conservative management style.
Verdict:
Winpak is well-financed and is in a good position to pursue acquisitions
that will result in a positive surprise in the share price. However, the track
record of this management team seems to favor organic growth instead of mergers
and acquisitions. The probability of an accretive acquisition might not be high
but a dividend increase is possible if the company realizes they are not going
to pursue a big acquisition in the medium term. A dividend increase might
result in positive response in the share price in the near term.
The business of Winpak is well run and it is backed by a patient controlling
shareholders with a long term view on the development of the company. The growth target of the management team is
reasonable. Winpak is a good company with good ROE numbers, stable growth & steady profit margins. You might consider adding it to your portfolio if you like good boring business with modest growth potential.
In the first 9 months of 2012 revenue increased 3.4% and net
earnings increased 10.5% to 77 cents per share. Profit margin was more or less
unchanged. It seems growth in earnings might slow down after 5 consecutive years
of out-performance. Recent analyst down grade of the stock is pointing to the
fact that investor expectation might be high but not unreasonable.
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