Shares of Clearwater Paper Company (NYSE:CLW) surfaced on my radar because the paper enterprise introduced a considerable acquisition lately. The corporate is doubling its give attention to paperboard and is trying to get out of the extra aggressive tissue enterprise, through which it holds a smaller market share.

That appears good on paper, however nonetheless has to play out in actuality. Whereas present earnings multiples are non-demanding by all means, I’m considerably cautious to leap onboard amidst the massive strategic strikes being made, the truth that margins at present are available in above-average already, in addition to a mediocre long run efficiency.

The Enterprise

Clearwater Paper is a $2 billion business which is comprised out of two fairly equally massive paperboard and shopper product enterprise.

The corporate is a high 5 producer of paperboard, through which it serves a diversified vary of finish markets, making it effectively positioned for extra sustainable merchandise. Functions to think about largely embody folding cartons, in addition to cup & plates, because the enterprise unit generated $1.06 billion in gross sales in 2023 on which EBITDA margins of 19% and phase margin of 16% had been reported.

Within the shopper merchandise enterprise, Clearwater offers tissue merchandise with nationwide scale provide chain capabilities, benefiting from a development in the direction of non-public manufacturers and resilient shopper demand. The unit largely produces towels and tub merchandise, complemented by smaller gross sales of facial merchandise and napkins.

With $1.02 billion in gross sales, the unit is comparable in measurement to the paperboard enterprise, but EBITDA margins of 15% and phase margins of 9% are available in a bit decrease, because the market shares on this bigger phase is rather more modest. With a 6% market share, the corporate is a smaller enterprise in relation to Georgia-Pacific, Procter & Gamble (PG) and Kimberly-Clark (KMB), as key opponents. Working with sustainable fibers, Clearwater claims to profit from resilient and protection product positioning in addition to a sustainable future.

Present Outcomes

In February, Clearwater reported its 2023 outcomes, a yr through which revenues had been primarily flat at $2.08 billion. Aided by decrease vitality prices, amongst others, working earnings improved to $177 million, for margins equal to eight.5% of gross sales, up greater than three factors from the yr earlier than.

With internet earnings reported at $107 million, Clearwater posted GAAP earnings equal to $6.30 per share, based mostly on a share depend of simply over 17 million shares. Web debt is reported at $463 million, a manageable quantity with EBITDA for the yr reported at $281 million, for a 1.7 occasions leverage ratio. The dearth of enchancment in full yr gross sales was partially the results of a 3% fall in fourth quarter gross sales, attributed to a pure fuel disruption at one among its mill operations, as effectively deflationary pressures.

With 17 million shares buying and selling at $40, the $680 million fairness valuation values the enterprise at $1.14 billion based mostly on the enterprise valuation. Which means that the corporate trades at a non-demanding a number of of simply round 7 occasions earnings.

Furthermore, the corporate guided for a strong 2024 developing, a yr through which the corporate sees continued power within the tissue market, with paperboard demand anticipated to recuperate within the second half of the yr.

Maybe of better significance, the corporate introduced an enormous deal alongside the discharge of the 2023 outcomes, one with better strategic ramifications.

A Massive Deal

On the identical day of the discharge of the total yr outcomes, Clearwater reached a $700 million deal to acquire the Augusta, a Georgia-based bleached paperboard manufacturing facility from Graphic Packaging (GPK).

The location has 600 thousand tons of bleached paperboard annual capability, set to contribute some $140-$150 million in EBITDA by 2026, with present EBITDA reported at $100 million, suggesting {that a} 7 occasions EBITDA a number of has been paid. Compared, Clearwater trades simply over 4 occasions EBITDA, as it’s this greater a number of which frankly makes me a bit cautious right here.

That mentioned, synergies ought to scale back the EBITDA a number of to 4.5 occasions by 2026 totally on the again of elevated utilization numbers, whereas the better market share on this enterprise makes it a extra engaging market phase versus the extra aggressive tissue market.

Furthermore, the corporate introduced that it’s going to discover strategic choices for its tissue enterprise because it focuses on paperboard, through which it has a bigger market share.

That is likely to be wanted, as professional forma internet debt will leap to $1.16 billion upon closing of the deal, with EBITDA seen slightly below $400 million right here, for a leverage ratio close to 3 occasions, though the corporate mentioned on the call that leverage ratios are seen within the mid-3s as near-term EBITDA is anticipated to be pressured by upkeep actions.

And Now?

Traders like what they see, as shares of the agency have risen from ranges within the mid-thirties to in the direction of the $40 mark within the second half of the month. Whereas that is up from a $20 degree pre-pandemic, observe that this was already a $60 inventory within the 2014-2016s.

The explanation for that and the low earnings a number of is definitely understood if we glance again in time, this being a $2 billion enterprise a decade in the past already. Whereas 2023 working margins had been sturdy and confirmed an enormous enchancment, on common these margins have ranged round 5% of gross sales over this time period, as some 15% of the shares have been purchased again over this era in time as effectively.

Given the lackluster efficiency by Clearwater Paper Company, and a costlier deal, by means of which some leverage is incurred, I’m leaning cautious regardless of a low present a number of. Each one level change in working margins impacts earnings per share by practically a greenback, as the present margin efficiency traditionally has been very excessive.

Even when margins normalize, Clearwater Paper Company trades at simply round 10 occasions earnings, which appears to be like compelling, however given the mediocre long run efficiency and bolt resolution being made, I’m taking a wait-and-see strategy right here.