Tickers in this Article: KS, DELL, AAPL, IP, FBR, UFS
After going public on January 5, 2010, KapStone Paper and Packaging (NYSE:KS) has produced a 32% return while the S&P 500 has remained relatively flat, appreciating only 3% in the same time span. Although the paper and paper products industry does not have the glamour associated with the personal computer industry - which touts powerhouses like Apple (NASDAQ:AAPL) and Dell (NASDAQ:DELL) - KapStone quietly emerged in fifth place on Fortune's list of the fastest growing companies.

IN PICTURES: 5 Tips To Reading The Balance Sheet

Balance Sheet Strength
KapStone has been gradually showing improved signs of financial strength over the last few years. Its net debt position has steadily decreased every year from $448 million to $106 million, and it currently operates with a debt-to-capital ratio of 0.23. With current rates on outstanding debt at 1.8%, KapStone does not have an excessive debt burden. Furthermore, year-over-year net sales escalated by 28% as both the number of customers and the prices increased. Average revenue per ton increased from $535 in the first quarter to $585 in the second.

Fundamental Valuation
The firm trades at reasonable valuations, with a low P/E ratio of 8.58. Furthermore, its price-to-cash-flow multiple suggests that KapStone may be undervalued when compared to the industry. KapStone's major competitive advantage is its extreme effectiveness in generating cash. With $35 million of operating cash flows generated in its second quarter, KapStone Paper and Packaging is trading at 3.67 times free cash flow, while the average firm in the industry trades at 9.24.

Growth Prospects
With two highly effective paper mills, KapStone has the capacity to produce 1.3 million tons of paper annually, while maintaining relatively low capital expenditure requirements of approximately $24 million. As the economy improves and business activity continues to rise, KapStone can utilize their pricing power advantage to charge prices per ton that are equivalent to the 2008 levels of $621. At current production capacity, this would generate over $800 million in revenue.

Bottom Line
Among its competitors in the paper and paper products industry, such as International Paper Company (NYSE:IP), Fibria Celulose (NYSE:FBR) and Domtar Corporation (NYSE:UFS), KapStone ranks among one of the top firms in terms of revenue growth and return on equity. While many analysts criticize this stock as being overly risky and overvalued, the fundamentals suggest that there may be hidden value in this fast growing company.

Take note as KapStone will be announcing earnings on November 3.

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