|
|
|
Wednesday, January 7, 1998
American Pad and Paper Co.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGP)") else Response.Write("(NYSE: AGP)") end if %>
Phone: 972-733-6200
Price (1/6/98): $8 5/8
HOW DID IT FIND TROUBLE?
American Pad wasn't around when Bartleby the scrivener inhabited Wall Street. But having invented the legal pad in 1888, old Ampad has been pushing paper for a long time.
Nothing, though, prepared it for the response late last summer from its mass merchant and superstore customers. Asked if they were ready to buy more paper, the stores said they preferred not to. Investors caught the bug, preferring not to buy the shares.
In 1992, Bain Capital acquired Ampad from Mead Corp. and made it an industry consolidator, delivering 53% annual sales growth through 1996. The stock responded, going public at $15 in July 1996 and rising to around $24 a share by last September. Then the bad news started rolling out and the stock unraveled.
The Ampad division's sales of writing pads and filing supplies were whited out in the third quarter as customers reduced inventories. Soft demand and tight prices for envelopes also hurt its Williamhouse division. The third quarter produced just $0.06 per share in earnings on flat sales, versus estimates for $0.45. The company still expected FY97 earnings to be around $0.50 per share. Nonetheless, the stock crumpled $10 5/16 to $13 7/8. Six weeks later, the CFO resigned.
Then December brought the end to all paper profits, plunging the stock into a blackness ten times black. American Pad announced that it would miss the $0.09 per share consensus estimate for the fourth quarter, instead reporting a quarterly loss of $0.46 to $0.50 per share, for a loss of $0.06 to $0.10 per share for the year.
The company blamed accounting charges caused by paper price increases, adjustments to costs of goods sold, and a change in the assumed tax rate. Gross margins also fell during the quarter due to a change in the sales mix and the need for more promotional sales to whittle down inventories. Hurt by a Salomon Smith Barney downgrade to "neutral" the day before, the stock was trashed on this bleak report.
BUSINESS DESCRIPTION
American Pad & Paper is a leading North American manufacturer of paper-based office products, including writing pads, file folders, machine papers, and envelopes. It markets these products under brand names such as Ampad, Century, Embassy, Gold Fibre, Huxley, and Peel & Seel. Its Williamhouse unit is the largest manufacturer of envelopes for paper merchants, with 30 brands, including Hammermill and Strathmore.
The company has focused on the largest and fastest-growing segments of the office products biz, including office products firms such as Boise Cascade, superstores such as Office Depot and Staples, and paper merchants such as Nationwide and Zellerbach. The firm operates a network of 21 manufacturing and distribution facilities.
Sales growth has come largely through an aggressive acquisition strategy, with the company picking up Williamhouse-Regency in October 1995 for $300 million, Niagara Envelope in June 1996 for $53 million, and machine paper firm Shade/Allied last February for $49.5 million.
From 1992 to 1996, American Pad exhibited skill in streamlining these growing acquisitions, cutting fixed manufacturing costs from 7.4% to just 5% of sales while trimming selling, general and administrative expenses from 10% of sales to just 8.2%.
Insiders control 41.3% of the stock, with Bain Capital holding most (36.2%) of these shares.
FINANCIAL FACTS
Income Statement
12-month sales: $669.5 million
12-month income: $20.8 million*
12-month EPS: $0.72*
Profit Margin: 3.1%
Market Cap: $253.5 million
(*Excludes extraordinary items)
Balance Sheet
Cash: $0.7 million
Current Assets: $250.2 million
Current Liabilities: $117.4 million
Long-term Debt: $368.5 million
Ratios
Price-to-earnings: 12*
Price-to-sales: 0.38
(*The projected fourth quarter loss will wipe out trailing earnings)
HOW COULD YOU HAVE SEEN IT COMING?
Prior to the third quarter announcement, American Pad had scratched off impressive growth. Despite operating in a cyclical, competitive business, its share price wasn't totally out of whack with earnings estimates, either. Plus, Mailwell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWL)") else Response.Write("(NYSE: MWL)") end if %> was playing the consolidation game for great profits, too, albeit in the direct sales part of the envelope biz.
But inventory troubles can last a quarter or two. Given that American Pad's bad news came in mid-September, not long before tax-loss season, investors might have taken a wait-and-see attitude. This is especially true because the company's substantial debt meant that a significant slowdown in sales could create problems with creditors. The CFO's resignation on November 3 provided even more reason to worry.
WHERE TO FROM HERE?
First Call's analysts' EPS estimates calling for $0.26 in FY97 and $0.61 in FY98 should be torn up. Yet Chair/CEO Charles Hanson still thinks the company is well-positioned to benefit from continued industry consolidation, with the increasingly dominant office supply retailers looking to do more business with large firms that offer a broad line of products on a timely basis, such as American Pad.
Inventories held by distributors and customers are being worked down. The company has launched new programs to control costs and is still trying to broaden its distribution base, in part by cross-selling products within current channels. Plus, the company raised some prices in December and plans additional price increases on selected products during the first quarter of '98, which should boost the sagging gross margins.
Gregory Benson, the company's CFO from 1992 to 1996, has returned until the company finds someone to replace Kevin McAleer, the CFO who resigned in November. The company has yet to make any announcement about renegotiating its revolving credit agreement, but the third quarter report expressed confidence that this shouldn't be a problem.
Although the price-to-sales ratio looks awfully attractive, it's deceptive. The company's high debt load leaves American Pad with annual interest payments of nearly $40 million. Under profitable conditions, it generates ample cash to cover that expense. Unprofitable conditions are a different story.
American Pad isn't a screaming bargain at 5.6 times book value. But when Ampad came on the scene, the reading public didn't think much of Herman Melville's book value either. If American Pad can put profits to paper in '98 as it did prior to its recent troubles, the stock could see a whale of a recovery.
-- Louis Corrigan
([email protected])
Check out the Daily Trouble Message Board!
|