Seeking Alpha: Orchids Executing Well, But The Valuation Already In Bloom

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.

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Orchids Executing Well, But The Valuation Already In Bloom

Seeking Alpha: Orchids Paper Products Taking Big Swings To Become A National Player

Say what you will about Orchids Paper Products (NYSEMKT:TIS), but you can't accuse the company of lacking ambition. When I last wrote about this manufacturer of private label paper products like towels, toilet paper, and napkins, the company was a regional operator focused on serving customers (largely dollar stores and Wal-Mart (NYSE:WMT)) within 500 miles of the company's Oklahoma facility. About a year later the company is now pursuing plans that will have it operating as a national player (or at least very close to it) within a year.

There is certainly risk with Orchids' strategy, as the company will be adding meaningful debt to its balance sheet and the private label market has ample competition from the likes of Clearwater Paper (NYSE:CLW), Cascades (OTCQB:CADNF) (CAS.TO), and First Quality just to name a few. I'm also a little concerned about the potential disruption to the business over the next couple of years from this ambitious expansion plan, as well as the aggressive free cash flow efficiency assumptions baked into the price. All of that said, I don't think a $30-$31 fair value is unreasonable at this point and that would argue that this is a name worth following.

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Orchids Paper Products Taking Big Swings To Become A National Player