This December it will mark seven years since Kimberly-Clark (NYSE:KMB) spun-off Neenah Paper (NYSE:NP), its specialty paper manufacturer. Shareholders received one share of Neenah Paper for every 33 shares of Kimberly-Clark. Neenah Paper's first trade came December 1, 2004, at $35.07 a share. Since then it's mostly been downhill, although it's well off its all-time low of $3.26 in early 2009. Business is better for the company these days. Now is the time for the former spin-off to takeoff.

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Second Quarter Earnings
Everything about them was good. Starting with the top-line, revenues grew by 8% to $183 million. Its technical products segment delivered 100% of the growth in the quarter, increasing revenues by 15% to $114.5 million while the fine paper division's sales were flat at $68.5 million. Most of the growth came courtesy of higher volumes, improved selling prices and a more favorable mix. In terms of operating profits, technical products increased 15% to $9.8 million and fine paper grew by 9% to $10 million. Wrap it all up in a nice package and you'll see that diluted earnings per share were 49 cents, 24% higher year-over-year. There's nothing wrong with these numbers.

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The Gold Standard
I've gone back and compared its second quarter results for the last eight years since it went public in late 2004. Its best second quarter in terms of revenue was 2007 at $258.1 million. However, its operating margin was only 4.4%, meaning its operating profit was just $11.4 million, 430 basis points lower than in 2011. Conversely, its best second quarter in terms of operating margins was 2004 at 18%. Its revenues that quarter were $207.4 million, generating an operating profit of $37.3 million. Averaging all eight quarters together, I get quarterly revenue of $185 million and an operating margin of 8.9%. That puts Neenah Paper's current results squarely in the middle and trending higher. Assuming business continues at current growth rates, 2012's second quarter would see revenues above $200 million for only the third time in nine years and operating profits above 9%. All of this leads to 64-cent earnings per share, a 30.6% increase over Q2 2011. Analysts expect 15% EPS growth in 2012. I'm going out on a limb to suggest the number could be more like 25% or $2.31 a share. That's a forward P/E of 7.3, which is definitely too low if the growth is there.

Neenah Paper and Peers

Company

 EV/EBITDA

 Dividend Yield
Neenah Paper (NYSE:NP)

 5.12

 2.7%
Mercer International (Nasdaq:MERC)

 4.31

 N/A
Louisiana-Pacific (NYSE:LPX)

 101.02

 N/A
Domtar (NYSE:UFS)

 2.82

 1.6%
PH Glatfelter (NYSE:GLT)

 5.81

 2.7%



Stock Performance
As I mentioned in the opening, Neenah Paper's stock hit a low of $3.26 in March 2009. On the high side, it got to $45.56 in May 2007. In approximately 22 months, it lost 93% of its value. That had to hurt Kimberly-Clark shareholders still holding from the spin off. If you're still holding, I'd hang on to those shares. It pays a decent dividend and looks ready to take its business to the next level. In the seven years it's been a public company, three have been positive and four negative. With the exception of 2008, the losses have been less than 20%. Therefore, if you do own the stock, consider buying some more at the end of December once tax-loss harvesting is complete. If you can put up with the volatility, you should do well buying on the dips over the long term.

The Bottom Line
Predicting future stock prices is a mug's game. All I know is Neenah Paper's business is good and its stock is cheap. Whether this translates into a higher price is up to the markets. (For additional reading, take a look at Cashing In On Corporate Restructuring.)

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