Our next category is old-economy stocks, left for dead, now showing surprising growth in sales, profits and dividends.
The envelope, please.
The winner, Supremex Inc., is actually Canada's dominant maker of envelopes with a 60-per-cent share of the market. However, recognizing that the trends of traditional mail are working against it, the company has been busy developing a "specialty packaging" business that targets the remaining avenue of growth at Canada Post: E-commerce, and all the boxes and packages that come with online ordering.
This, and a host of other positive developments, has helped Supremex post a remarkable performance this year. Its shares are up 45 per cent so far, not counting a dividend, raised twice in the past 12 months, that currently yields 6.6 per cent.
The performance is such that Supremex's market capitalization of $87-million is in spitting distance of its former parent company, Cenveo, which has more than 17 times as much revenue. Debt-heavy Cenveo, which spun off Supremex in 2006, has seen its shares fall 44 per cent this year, with a disappointing third-quarter performance a particular culprit.
Surprised? I certainly am. I recommended Supremex in April 2012, when the shares were $1.88 and the yield was the same 6.6 per cent. It was part of a series of columns I did during that time that suggested investors were over-estimating the speed of the digital convergence and weren't giving old-fashioned companies a fair shake. ("Are we really ready to stop mailing things? Is the all-digital life just around the corner?")
It took me less than five months to renounce that call in "Why the 'dead-tree' industry is a value trap," a column that noted all sorts of cash-generating businesses were cheap, and getting cheaper, because investors hated everything to do with paper. (Newspaper companies, commercial printers, office-supply retailers, makers of ink and desktop printers.)
Has the outlook for paper changed? Not necessarily. But a number of things have happened at Supremex, mostly for the good:
The company has sharply reduced its debt. Net debt to EBITDA, which measures debt-minus-cash versus earnings before interest, taxes, depreciation and amortization, has fallen to 1.1 on Sept. 30, down from 2.8 at the end of 2009 and 1.8 at the end of 2011.
Supremex also eliminated its pension deficit in 2013 (in part through cutting the workers' early-retirement benefits). Combined with its debt reduction, this allowed for the continuation of an aggressive share buyback program and the increase of the dividend from 3 cents a quarter to 5 cents.
The third-quarter results showed a surprising gain in sales (8.3 per cent) and profits (66 per cent), although Supremex is careful to caution investors that due to order flow and seasonal volatility, one quarter does not a trend make. Still, the numbers were pleasing: In Canada, where Supremex has 60 per cent of the envelope market, it passed along rising raw-materials costs to its customers and still sold 2.1-per-cent more envelopes than in the prior-year quarter.
Supremex expects Canada Post's "transaction" mail volume to decline at 4-per-cent annually through 2016, mitigated somewhat by the Harper government's opposition to major companies charging their customers to receive paper bills in the mail. By contrast, package volume should increase by 3-per-cent annually, Supremex says.
Interestingly, it's the U.S. government that has given Supremex its first big specialty-packaging win, with a $27-million, three-year deal to supply a federal agency with an envelope called the "Conformer." The United States, in fact, gives Supremex another opportunity. The company has a plant in Buffalo that can serve the U.S. Northeast – one of the world's biggest envelope markets. Competitor National Envelope has failed, with Cenveo snapping up the assets out of bankruptcy.
That means there's one less U.S. envelope maker, with higher prices the likely result of the lessened competition.
So, are we back to calling Supremex a buy? Analyst Adam Shine of National Bank Financial, who has been dutifully covering Supremex for years, has a "sector perform" rating on the shares, albeit with a target price of $3.25 that implies a 15-per-cent return with the dividend yield included. Supremex' current share price, even with the big 2014 return, is still cheap compared with other North American printers, he notes, although "greater secular pressures" in the envelope space warrant a discount.
The caution seems warranted. But so much is going right for Supremex right now, suggesting investors take another look might not be … well, pushing the envelope.
David Milstead