Boise Inc. (BZ) is a paper and packaging products company. On the paper side, Boise manufactures office paper, commercial printing paper, envelopes, forms, and newsprint. The packaging segment manufactures label and release paper, flexible papers used for food wrap and other applications, linerboard and corrugating medium, which are combined to make containerboard, the base raw material in corrugated sheets and containers. The company began operations in February 2008 when Boise Cascade sold its paper and packaging assets, which were renamed Boise Inc.
Second quarter earnings were released August 4. Boise’s second quarter EPS of $0.11 was below analyst consensus of $0.145 as the paper business was impacted by increased input costs and maintenance. However, during the quarter the company removed several overhangs on the stock. First, it concluded a new long-term purchase agreement with OfficeMax (OMX) that lasts through 2017 (the previous agreement was set to expire in 2012). Second, the declaration of a $0.40 per share special dividend resulted in the conversion of warrants into common stock at $7.50 per share (see below) -- the second $0.40 dividend in the past eight months. Third, the company completed the majority of its annual maintenance outages and has no schedule outages in the third quarter and only one in the fourth quarter. Fourth, the packaging segment continues to grow and become a larger portion of Boise’s overall business.
Warrant Conversion and Share Buyback
The special dividend led warrant holders to convert their warrants into common stock to capture the dividend. A strike price of $7.50 meant the company received proceeds of $7.50 per warrant for a total of $285 million. In the midst of the dramatic decline in the stock price, the company announced a $75 million share repurchase program. Effectively, the company is in position to take warrant proceeds of $7.50 per share and use it to buy back stock at $5.70 per share, a massively accretive transaction for the company.
From July 22 through August 12, Boise’s stock price has fallen over 25% from $7.70 per share to $5.72. On August 8, Boise closed at $4.42 (43% below its July 22 closing price) before rebounding to $5.72 over the remainder of the week.
During the market sell-off, Boise’s largest shareholder, Janus Capital, sold approximately half its stake and now owns 4.5% of the company (see Schedule 13G filing). Surely this contributed to the magnitude of Boise’s sell-off.
At its current stock price, Boise is trading at 0.5x trailing sales, 3.4 trailing EBITDA, and 5.4x trailing earnings. For the sake of comparison, International Paper (IP) trades at 0.7x trailing sales, 4.7x trailing EBITDA, and 8.2x trailing earnings. Temple Inland (TIN), trading 10% below IP’s offer price of $30 per share, is trading at 1x trailing sales, 9.1x trailing EBITDA, and 14.9x trailing earnings.
Boise is oversold. The stock sold off more than the market over the past few weeks as its largest shareholder liquidated half of its stake. Even in a recession scenario in which Boise’s EBITDA declines by 50%, the company will still trade at a mid-single digit EBITDA multiple. Boise’s management is shareholder-friendly, as evidenced by the special dividends and share buyback program. Further, Boise is an acquisition candidate as the paper/packaging industry consolidates. Boise should be trading in the high single digits, which represents a significant return from its current level.