The shares of specialty paper company Glatfelter (NYSE:GLT) have done all right this year, but the stock remains virtually unknown and unfollowed. Although a company that makes specialty papers and fibers used in products like K-cups and hygiene products isn't going to be an explosive growth story, Glatfelter is the sort of company that can slowly build value over time.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Strong Leverage Boosting Results
Glatfelter admittedly had a quiet second quarter from a revenue perspective. Revenue fell 3%, as reported, due in large part to adverse currency moves. Adjust out the foreign exchange impact and revenue was flat, as a 2% reduction in shipments offset higher prices.
The company's largest segment, specialty papers, saw revenue decline 1% on a nearly 3% decline in volume - a decline influenced in part by maintenance outages. In both composite fibers and airlaid materials, reported revenue declined by mid-single-digit percentages, as currency moves offset volume and price improvements - net of forex, revenue was up slightly in each segment.
Glatfelter may have had less to work with from a revenue standpoint, but the company did more with it. Gross margin improved more than a full point, while reported operating income nearly tripled. Even after stripping out a sizable gain related to asset disposition, operating income still rose 73% and the company handily beat estimates (all three of them).
SEE: Valuing Small-Cap Stocks
The Need for Ongoing Investment Leverage
If Glatfelter is going to work as a stock, the company needs to stabilize its free cash flow generation and build its return on capital. Keep in mind that 2009 and 2010 look a little better than they actually were, as the company saw the benefit of various credits and underspent on capital investment. Nevertheless, this is the sort of company where even a modest improvement in free cash flow conversion (even just half a percentage point) can lead to significant free cash flow growth and a higher fair value.
If the company can continue to innovate and sell prospective customers on its products, the future looks good. While losing patent protection on K-cups is trouble for Green Mountain Coffee Roasters (Nasdaq:GMCR), it could prove to be a good thing for Glatfelter if more competition (and, presumably, lower prices) spurs even more consumer demand. Likewise, if companies like Teavana (NYSE:TEA) and Peet's (Nasdaq:PEET) can turn Americans from soda drinkers to tea drinkers, the sales potential for those bags and filters ought to be meaningful as Glatfelter already has about 70% share.
SEE: Top 5 Patent Holders
Get Bigger, or Maybe Go Away?
The specialty paper market doesn't really capture headlines or airtime, so investors may not realize that Glatfelter has a lot of expansion potential. In the auto industry, for example, there are applications in areas like filters, labels and adhesives, while the company could also expand its food and beverage operations in directions like casings and wrappings. There are also many potential applications in the housing industry - from products like acoustic ceiling panels to insulating materials, to papers and fibers used in laminates.
At the same time, Glatfelter could find itself as an appealing option for a company that wants to grow its addressable end markets. I don't necessarily see a company like International Paper (NYSE:IP) taking the plunge, but a company like Ahlstrom or Georgia Pacific may feel differently, particularly with Glatfelter's sizable share of the U.S. coffee/tea market. Perhaps even Buckeye Technologies (NYSE:BKI) could be interested, though the size of such a deal would make it more of a merger than a buyout.
SEE: Small Caps Boast Big Advantages
The Bottom Line
I have no doubt that many readers will take a quick look at Glatfelter and promptly dismiss it. It's true that returns on capital aren't great, the end-market growth is modest and the company is exposed to difficult-to-control input costs. However, I think that it's important to also remember how the company has repositioned itself over time to take advantage of higher-margin, more differentiated product opportunities.
Even modest low-to-mid single-digit free cash flow growth is sufficient to make this stock worth a look today. Given management's demonstrated ability to drive better operating leverage and a wealth of new potential market opportunities, Glatfelter is an under-appreciated small cap that could do well for patient shareholders.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
EntrepreneurshipLearn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
EntrepreneurshipWhether or not you are a fan of human resources, every employer needs to know the answers to these questions.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
EntrepreneurshipThere are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
EntrepreneurshipLearn about some of the most successful crowdfunding campaigns on Indiegogo, which raised millions of dollars for everything from electric bikes to beehives.
EntrepreneurshipLearn about how the Marketplace Fairness Act may impact small business owners should it pass in the House and what the act requires from business owners.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EntrepreneurshipMost family businesses do not survive in successive generations, but these steps can help ensure that yours will.
EntrepreneurshipFind out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>