The Long Case For Schweitzer Mauduit International

Elevator Pitch

Schweitzer-Mauduit International, Inc (NYSE:SWM) reported after the bell on Feb. 5th, 2014. At the current share price of $47.25, this $1.5B company is paying a 3.05% yield while priced at a P/E of only 13.5. Back in November, the company announced a 20% increase in its dividend, showing further strength during a period of difficulty in the overall sector. The company also announced that a quarterly cash dividend of $0.36 per share will be payable on March 20, 2014, to stockholders of record on February 28, 2014.

Company Description

Schweitzer-Mauduit International, Inc. is a diversified producer of specialty papers. It operates in two segments: Paper and Reconstituted Tobacco. The primary products in the group include cigarette, plug wrap and base tipping papers, or cigarette papers, used to wrap various parts of a cigarette and reconstituted tobacco leaf (RTL), which is used as a blend with virgin tobacco in cigarettes, reconstituted tobacco wrappers and binders for cigars. Paper segment primarily produces Cigarette Papers, such as cigarette (including LIP), plug wrap and base tipping papers used to wrap various parts of a cigarette for sale to cigarette manufacturers. The Reconstituted Tobacco segment produces RTL and wrapper and binder products for sale to cigarette and cigar manufacturers. In December 2013, American Capital Ltd announced that its portfolio company DelStar, Inc., including its subsidiary DelStar Technologies, Inc., was sold to Schweitzer Mauduit International Inc.

Thesis and Catalyst For Schweitzer Mauduit International, Inc.

The DelStar acquisition creates a platform for a new Filtration Segment and offers SWM organic and acquisition-related growth prospects in addition to capturing high-return commercial projects. Accumulation of the stock has been heavy around $47 and with earnings out of the way, our short term target on SWM is $53 based on positive earnings accretion from DelStar.

More conservative investors might wish to see if the stock pulls back again to ultimately test $45 for support, or can begin legging into a long position now and adding on a pullback. The 3% dividend yield is a solid long-term cushion and after a major correction lasting 5 months, the stock is priced at a very cheap P/E of 13. This compels us to make a long recommendation on $SWM with a short-term target of $50-$51 and a target of $57 by the end of 2014. Combined with the dividend, that presents a potential return of over 20% for a very well-managed company selling at a significant discount compared to only five months ago


Bears attempted to push $SWM below $47 several times since last November, failing every single time. It now appears the stock has gained upward momentum and is showing signs of pulling away from $47 on increased turnover. It's important to note that the all-time high of $42 was set on January 29th, 2010. The stock decisively broke through this barrier in November of 2013 following the DelStar acquisition and got to almost $70 per share before commencing the sell-off which brought prices down to their current level.

Company Management

Following the Company's Q4 earnings release after the close on Wednesday, February 5, 2014, there were no downside surprises. During the fourth quarter, SWM acquired DelStar, Inc. for $231.3 million in cash and established a third reporting segment called Filtration; the transaction is expected to add approximately $0.25 to $0.27 to 2014 Adjusted Diluted EPS.

The company's ability to maintain profits despite significant industry headwinds and their continued focus on operational excellence, with another year of more than $25 million of year-over-year pre-tax savings in 2013, is indicative of a management team able to execute during tough times. The stock has declined by 24% since last October, with most of that decline occurring over a few days, culminating with a November 7th panic on historically high volume which brought prices down from $59 to $49 in a single day. More importantly, at the current market cap of $1.5 billion, the company could become the target of a takeover, either friendly or hostile, which would trigger another upside catalyst.

Competitive Landscape

The only concern is that 95% of the company's float is held by institutional shareholders. When so much is held by institutions, there is always the possibility of large funds rushing to sell shares if anything spooks investors. At the same time, the large amount of turnover suggests a large percentage of the stock has changed hands around $50. These investors will likely keep their stock off the market until realizing a significant gain.

Variant View

Customer inventory overhangs and accelerated smoking attrition rates in Western geographies, combined with potential changes in customer tobacco blends, are driving 2014 weakness. Throughout its 50-year history, the company's cigarette paper business has experienced periodic volatility, but the company is developing several product enhancements while exploring additional ways to leverage technologies in new market segments that will help drive long-term growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.