INTERTAPE POLYMER GROUP (ITP-T)
Revenue (2016) $809 million (U.S)
Market Cap $1.2 billion
Number of Employees 2,200
If there's any city in Canada that oozes creativity and sex appeal, it's Montreal. So you might be surprised to find out that it's also home to one of the most stolid companies on the Toronto Stock Exchange. The 36-year-old Intertape Polymer Group makes tape: duct tape, masking tape, electrical tape, tape that keeps airplane windows shut and nearly every other type of tape you can imagine. It's not the most exciting industry, but the company's returns have been anything but bland. Over the past decade, Intertape's share price has climbed by 502%, far exceeding the S&P/TSX Composite Index's 10.5% gain.
Intertape is the kind of company many investors regret not buying years ago. It experiences steady, GDP-like revenue growth, generates positive free cash flow and pays a decent dividend, which is why it has an average rating of "outperform" among analysts, according to S&P Capital IQ. But the company has faced some challenges lately, and its share price plunged by almost 30% between July and September, when it became clear that Intertape would post disappointing second-quarter profits. That price slide clearly scared some investors, but many analysts think it also made the stock a bargain.
Although Intertape is still a mid-cap stock, it is the No. 2 tape maker in North America behind 3M, the $140-billion (U.S.) conglomerate. Until a couple of years ago, however, Intertape's focus was mostly on cleaning up its balance sheet, rather than pursuing growth. In 2010, Greg Yull succeeded his father, founder Melbourne Yull, as CEO. Dad had gone on an acquisition spree in the early 2000s, and that boosted long-term debt. "Greg had to transform the company," says Luciano Orengo, a portfolio manager with Manulife Asset Management.
Transform it he did. Yull revamped Intertape's pay program and started focusing more on gross profit, instead of revenue. He shut down underperforming product lines, closed plants and more. "I ran it as a turnaround," he says.
Over the past two years, Yull has shifted away from cost reduction and back toward acquisition. Intertape says it now wants to double in size over the next five to seven years—not an easy feat in a slow-growth industry. Since 2015, it has purchased five companies, including a low-cost manufacturer in India. But Yull says Intertape is taking a more disciplined approach to buying than it did years ago. "We want companies that either expand our product market share or add products to the channels we're in," he says. "And we don't have to do deals to be successful."
Intertape has also generated growth by improving efficiency and selling existing customers more types of tape. "Intertape
is trying to take market share from 3M and other competitors," says Jeff Mo, a portfolio manager at Mawer Investment Management. "Though others are trying to take market share from them."
Over the past few months, Intertape has been hit by a burst of rising input costs and fierce competition. Prices of resin and butyl acrylate have climbed—the latter, which is the main input cost in the tape made in the company's India plant, has jumped by about 50%, says Orengo. That's put pressure on profit margins. And a rival didn't increase the price of its tape, which made it hard for Intertape to compete on the affected products. The company has also had problems incorporating new technology in one South Carolina plant, and another factory flooded in 2015.
After several strong years, it appeared Intertape had faltered this summer. "That should be reflected in the stock price," says Mo, but he and Orengo think the problems are temporary and growth will resume. With company shares now trading at 12.5 times forward earnings, it's a good time to buy. "We didn't think it was especially expensive in today's market even before the price drop," says Mo, "but now the valuation is certainly reasonable."