In the modern era, players in industrial markets need a variety of diverse materials to operate effectively. Examples include resins, types of papers, fiber-based materials, etc. A number of companies in the market have thus increased to offer this type of product. One of these companies is a company called Schweitzer-Mauduit International (NYSE: SWM). Prior to FY2021, the company’s growth was not quite steady. But the trend was up. The company then saw a nice uptick in revenue last year, although earnings and cash flow did not follow. Overall, the stability of the company’s bottom line is attractive and, when combined with the fact that stocks are trading at low levels, indicates a company that likely offers good upside potential for investors to long-term, value-oriented.
An attractive niche player
As I mentioned before, Schweitzer-Mauduit is a provider of various manufacturing solutions. Operationally, the company is organized into two different segments. The first of these, called the Advanced Materials & Structures segment, sells resin-based products that are used in different applications for the healthcare, construction, industrial, transportation and filtration. Products here include resin-based nets, films, adhesive tapes, foams, and other nonwoven offerings. The company engages in extrusion-based activities that involve heating, softening and forcing through a metal die for its resin pellets. These are then used to form continuous sheets or strands that customers can order for any purpose. The company’s thermoplastic netting has a wide variety of applications, including as space netting in reverse osmosis water filtration devices. The company also produces thermoplastic polyurethane films that can be used in automotive paint protection and insecure toughened glass. The list of different functions for its product portfolio is almost limitless. In the company’s 2021 fiscal year, this particular segment accounted for 64.6% of its overall revenue and 38% of its segment profits.
The other segment of the company is called Engineered Papers. According to the management, this particular unit is responsible for the production of different paper products. For the most part, this includes tobacco-related papers that are used in the production of cigarettes and in reconstituted tobacco. One of its key products in this space is a cigarette paper product known as low ignition propensity cigarette paper. Cigarettes made from it are designed to self-extinguish when not actively smoked, a measure developed to reduce the risk of fire if a smoker falls asleep or drops their cigarette somewhere. Last year, this segment accounted for 35.4% of the company’s overall revenue and 62% of its segment profits.
Over the past few years, management has been very successful in growing the business. Revenue increased slightly between 2017 and 2020, from $982.1 million to $1.07 billion. Then, in 2021, sales jumped to $1.44 billion. This 34% increase in revenue was largely due to the company’s acquisition of Scapa, a transaction that added $305.6 million to the company’s revenue. This acquisition cost the company a total of $630.6 million. The company also found that changes in volume, product line and selling price contributed $42.5 million to the increase in revenue. And it has benefited from some changes related to foreign currency fluctuations.
Although we saw a nice increase in revenue, the company’s profits remained largely limited. After seeing that income rise from $34.5 million in 2017 to $94.5 million in 2018, it rebounded in a tight range between then and, at the low end of the scale, 83.8 millions of dollars. In 2021, the company’s profits totaled $88.9 million. Over the same five-year window, the company’s operating cash flow has improved significantly year over year. In 2017, cash flow was $131 million. By 2020, they had grown to $161.6 million. Then, in 2021, cash flow plummeted to $58.1 million for the year. However, if we adjust for changes in working capital, the previous four-year range narrows, while the 2021 reading for the company would be $119.5 million. Another profitability indicator to consider is EBITDA. Like operating cash flow, it has remained stuck in a very narrow range. The low point was $196.9 million in 2018. And the high point was the $212.9 million generated in 2020. In 2021, this figure was $209.1 million.
Despite relatively stable earnings and cash flow, management does not expect this to continue in fiscal 2022. The company is not providing any guidance on revenue. But they expect earnings per share to be between $3.50 and $3.95. Halfway through, that would imply a net profit for the company of around $118 million. Management also expects EBITDA to increase by 20-30%. This would imply a mid-term reading of around $261.4 million. No indication was given regarding cash flow from operations. But if we apply the same year-over-year growth rate to it that we should see with EBITDA, the company’s adjusted operating cash flow should be around 149.4 million. dollars for the year.
By taking this data, we can then price the business. Using its 2021 results, we see that it should trade at a price/earnings multiple of 10.6. This drops to 8 if we rely on the 2022 estimates. The price of the adjusted operating cash flow multiple would then drop from 7.9 to 6.3. And the company’s EV/EBITDA multiple would drop from 10.2 to 8.2. To put it all into perspective, I decided to compare the company to five similar companies. On a price-earnings basis, these companies ranged from a low of 3.9 to a high of 168.4. In this case, only two of the five companies were cheaper than our prospect if we use 2021 numbers. Using the price/operating cash flow approach, the range was 1.8 to 8.2. Four of the five companies were cheaper than Schweitzer-Mauduit in this case. Meanwhile, using the EV to EBITDA approach, the range was 1.9 to 14.1. Here, three of the five companies were cheaper than our target.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Resolute Forest Products (DP)||3.9||1.8||1.9|
|Mercer International (MERC)||5.6||5.2||3.8|
|Clearwater Paper (CLW)||166.7||5.4||10.7|
|Glatfelter Corporation (GLT)||80.9||8.2||14.1|
Based on all the data provided, I can say that the stability offered by Schweitzer-Mauduit is certainly attractive, as is management’s expectation that this year will represent a drastic improvement for the company. I’m also encouraged that while the company may be reasonably priced compared to similar companies, the shares look cheap in absolute terms. All of this combined makes me believe this is an attractive prospect for long-term, value-oriented investors to consider buying.