Mail-Well, Inc.
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Phone: 303-790-8023
Website: http://www.ctaonline.com/ir/mailwell.htm
Price (2/28/97): $19 7/8

HOW DID IT DOUBLE?

The envelope please! Six months ago Mail-Well was trading at approximately $10 per share. That was before a series of quarterly earnings announcements that were impressive by any account, especially for a stock carrying a price-to-earnings ratio barely over 6. The company grew earnings in fiscal 1996 at a rate of over 20% and bargain hunters took notice. The stock hit a high of $21 5/8 a few weeks ago. What is going on here? This is a sleepy maker of envelopes and provider of high-impact color printing services. Where is the growth coming from? Mail-Well is taking advantage of a highly fragmented business and is actively participating in industry consolidation. The economies of scale have made Mail-Well a formidable competitor for regional envelope companies, and Mail-Well's market share has expanded. It is now one of the top three high-impact color printers in the U.S., and is the single largest envelope printer in the country. The forces behind this double are a consolidating industry and stellar earnings performance in a relatively inexpensive stock.

BUSINESS DESCRIPTION

Mail-Well was the product of a 1994 leveraged buyout of Georgia-Pacific's envelope plants. These plants generated $255 million in annual sales and were purchased in the buyout for $155 million. The equity partners put up only $18 million; the rest was financed through debt. The company went public in 1995 and has been working down the debt load since that time.

The majority of earnings come from the envelope business. Mail-Well specializes in selling envelopes to direct mail companies. They offer attractive, color envelopes designed to be irresistible to the public. The other product line for Mail-Well is high-impact color printing services for things like corporate annual reports and catalogs. The high-impact printing market is $11.5 billion and the direct mail envelope business is a $2 billion market, providing plenty of room for Mail-Well to continue to grow.

1996 was a tough year in many respects. Direct mailers cut back because of high paper prices. However, over the long term direct mail is growing at a 5-6% annual clip. There are 190 closely-held envelope firms in the U.S. and Canada that provide ample opportunity for Mail-Well to grow through acquisition.

A notable feature of Mail-Well is its strong, experienced management. Chief Executive Officer Gerald Mahoney has been operating envelope companies for years. The company has been savvy in purchasing raw materials. It has implemented just-in-time delivery programs, and provides customers with warehousing services, inventory management systems and electronic communications. This appears to be a very well-run company.

An investment group lead by former Fidelity Magellan fund manager Jeffrey Vinik owns 6.5% of the company (as of Feb. 11, 1997).

FINANCIAL FACTS

Income Statement
12-month sales:     $778.5 million
12-month income:     $16.9 million
12-month EPS:         $1.42
Profit Margin:         2.1%
Market Cap:         $248.1 million 

Balance Sheet
Cash:                 $6.2 million
Working Capital:    $133 million
Long-term Debt:     $209.6 million

Ratios
Price-to-earnings:    14.7 
Price-to-sales:       0.32

Could This Double Have Been Anticipated?

A clue to the future performance of this stock could have been spotted in 1995 when the company grew revenues by 164% and income by a whopping 385%. Granted, the business is cyclical, but the continued strong earnings reports through 1996 could have generated some Foolish interest. Insider buys in August were another positive sign. That said, the debt load of this company might have put off a Foolish investor. I think this would have been a tough call in August.

WHERE TO FROM HERE?

Mail-Well trades at a PE of 14.7, and the company has expressed confidence in estimates of $1.65 per share for FY 1997. Analysts are more optimistic than management -- they recently raised estimates to $1.82 per share for 1997. The stock trades at between 10 and 12 times next year's estimates, depending on which number you want to use. The long-term growth rate is estimated at 12.5%.

Given that the company trades at a significant premium to its industry peers -- its PE is 166% higher, its price/book is 150% higher, and its return on equity is only 70% of the industry average -- the stock price seems to have caught up to expectations. The debt load is over twice the industry average and could weigh on the company in a cyclical downturn. This Fool believes the last double was well earned, but the next double will depend on a surprisingly strong performance by the company and the economy at large.

-Mark Weaver, MD (MF Uptrend)