KPPC a cash cow

I put a bit of money into Kapstone Paper today. Kapstone is a manufacturer of kraft paper, linerboard and dunnage bags in the US. I find the company to be an excellent cash flow and balance sheet play with strong earnings numbers and at a reasonable even cheap valuation.

Kapstone just announced their 4th quarter numbers earning .23/share up 46% over last year. For the year they earned a solid .75/share against a 6.55 share price at the close today giving them a PE of a modest 8.5. Its EV/EBITDA is under 3. Not only is it reasonably priced from an earnings perspective but the company generated enormous free cash flow over the last year of roughly 1.10/share which means its trading at about 6 times free cash flow.

The balance sheet is excellent with their cash and receivables of 86 million exceeding all balance sheet liabilities. Book value is roughly 4.00 per diluted share.

Prospects:
There are reasons for optimism for the companies prospects going forward. First there was a major capacity contraction in the Kraft paper business in recent years. This has pushed up the price of kraft paper and in fact is still pushing up prices. The company recently announced another price increase of $40 a ton which will partially benefit Q1 results and will fully benefit Q2 results. There is expected to be an increase in linerboard prices also. Increases in prices of course flow straight to the companies bottom line.

Recent consolidation in the industry should help also. International Paper recently purchased Weyerhaeuser's containerboard business which is expected to have a positive impact on the industry due to an expected reduction of capacity according to Claudia Hueston at JP Morgan. The company stated on their conference call that they expect for this to be a positive for the industry as well.

Finally I will engage in a bit of pure speculation here on another positive for the market for Kapstone's products. Kraft paper which is a large share of their business finds its heaviest use in paper grocery bags. This business was shattered over the last 20 years as paper was largely replaced by plastic. I suspect that trend may reverse. There is a strong environmental movement to restrict or ban the use of thin plastic grocery bags. The bags were banned in San Francisco last year and in January China banned them as well. Ireland in effect taxed them into oblivion back in 2002. The economics here seem interesting as a plastic bag costs about 2 cents. A paper bag costs about 5 cents and various plastic substitute bags are in the range of fifteen cents. I expect this environmental movement to pick up steam and I expect the net result to be that grocers will be using more paper bags at checkout. Indeed that has what has happened in San Francisco. The economics of the grocery industry with their razor thin margins just don't allow ultra-expensive alternatives.

Insider buys:
If that isn't a reason for optimism than insider activity may be. Insiders over the past 6 months have made net purchases of almost 250,000 shares at prices up to 7.26 well above current price levels.

The negatives:
There is not much growth baked into the cake here that does not involve price increases. The company has stated they are interested in acquisitions and they certainly have the balance sheet to pull them off but growth should be rather modest based on their existing business.

The company is also sensitive to changes in the costs of its inputs. Energy costs, transportation, wood chips, chemicals etc all have an effect on margins. The company has stated that the prices on wood chips remains stable however they have obviously seen an increase in energy costs, and chemical costs have also increased. Their pricing power should more than compensate for these factors but it is important to keep them in mind.

APL.V new position

Bought a token position friday in this canadian provider and servicer of centrifuges and other equip. Purchase price was .24/share.

This looks like a short term earnings play with a solid balance sheet that should put the floor under the price. At .24 the stock is trading at around book value but the company also earned .016 last quarter.

They have seen a substantial increase in product orders in fiscal 07. Of their 2.5 million in orders they have delivered 1.2 million. If I am reading this correctly they are implying they expect to fill an additional 1.3 million in Q4. That would roughly double their product sales and could generate EPS of .03 a share.

Here is the relevant quote from their last earnings release

"Firm machine sales for fiscal 2007 now exceed $2.5 million, of which only $1.2 million have been recorded to September 30, 2007. Combined with expected increases in parts revenues, Appulse management looks forward to a further increase in revenues and earnings in the final quarter of 2007."

I have to think it will look undervalued to someone when the next report comes out. It is thinly traded but with a good balance sheet underlying the stock and a whopper of a quarter coming up I think it was worth a small position.

AIRT guess that trade worked out

Cleared it out at just over 10. I feel like such a cheap whore. Its still pretty cheap here but the way the market has been running lately I have taken profits where I can.

Got a bad quarter from PNS today on higher SGA expenses and an outrageous 85% tax rate. Didn't think that would happen unless Obama got in office.

AIRT buy today

Picked up a few shares at 9.68. Looks attractive and oversold after reporting a .38 quarter last year and what should be a huge backlog with a recent 14.7 million dollar contract award. We will see if that turns out to be prudent.

Things to watch later this year

I have been saying for awhile I am not finding much to buy. Its not that I haven't found anything interesting but I haven't found much worth buying right now. What I have found are a number of companies that might be interesting as events unfold later this year. There are a number of companies worth keeping an eye on that could be well timed buys in the next 3-6 months. I am not saying they are buys but they are worth keeping on the radar for the future depending on how their respective businesses unfold.

Here are a few I am keeping an eye on

WPCS - My mistaken buy from February. WPCS continues to sign up new business at a rapid pace and their shortfall this quarter in EPS is really just about a deferral of business. That business presumably will be made up in subsequent quarters which could show exceedingly good results. Their guidance revision for the current quarter has shredded managements credibility but its pretty easy to imagine them returning to form and posting some .25+ quarters here in which case I think it will look like a bargain in the 6's. I will be keeping an eye on contract signings over the next few months.

PSP.V - A body armor maker that has gotten killed as growth stalled and expenses rose but they are offering guidance that suggests they may be crawling out of a hole to modest profitability by year end. I could imagine .01 a share in a late year quarter. If this thing falls off say under .30 and they start to show signs of progressing their business especially in terms of sales to the US government it could have huge upside. David Scott is a General Dynamics veteran so at least in theory he has the pedigree to move the company forward

JCTCF - Has weathered the housing storm very well which is kind of amazing. In addition they have a rock solid balance sheet trading at a modest premium to book and are guiding for a strong second half of 2008. Trailing 12 month EPS is 1.00 a share. You can't put too much stock into that earnings number as the next quarter or two could be weak but if they meet their "strong second half" expectations it could start looking cheap come summer.

Thats a couple. There are more on my list I may mention when I have some time.