Orchids Paper Products (NYSEMKT:TIS)
continues to be a company that has rewarded investor patience with
solid execution. As a growing player in the large private label market
for paper personal care products (paper towels, toilet paper, tissues,
etc.), Orchids has not only been focusing on expanding its geographical
reach and customer base, but also its product line up. Even more
importantly, at least from my point of view, the company has continued
to find ways to drive costs out of its processes and improve operating
efficiencies.
Management's performance has not gone unrewarded, with the shares up another 20% since my last write-up
and up close to 50% over the past year. Better still, there are solid
reasons to feel good about the company's future - the expansion into the
West Coast with Fabrica has gone better than expected, a new plant in
Barnwell will be coming on line (in segments) this year, and Orchids is
still only a small player in a large market (annualized revenue in the
$200 million range out of a total private label addressable market
opportunity in excess of $3 billion). Moreover, this is not a company
I'd bet against when it comes to finding better ways to make better
margins from its business.
All of that said, the
valuation is no longer what I'd call a clear bargain. I never like to
bet against good companies, and I'm definitely NOT recommending exiting a
position here, but even double-digit annualized revenue growth and
mid-teens FCF margin projects don't support a substantially higher fair
value. I'll be the first to acknowledge that good companies deserve
premiums and that a company like Orchids can outperform expectations,
but I think the margin of safety here is smaller than I personally like
for new positions.
Continue here for more:
Orchids Executing Well, But The Valuation Already In Bloom
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