3 Catalysts That Could Boost Orchids Paper

| About: Orchids Paper (TIS)
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Orchids Paper (NYSEMKT:TIS) was one of our first GeoBargain stocks since we launched GeoInvesting.com. We coded the stock as a GeoBargain on February 4, 2009 at $9.78 and removed it from this list on February 25, 2010 at $18.27. The stock attained a high price of $22.10 on January 13, 2010 during its tenure as a GeoBargain.

On February 25, 2010, we commented that we would visit this story once a planned capacity expansion took hold.

Three clues indicate that Orchids Paper may be entering an above average near-term EPS growth phase.

  1. Up to November 10, 2011, we were still not impressed with the financial performance of TIS since its exit as a GeoBargain. But the October 26, 2011 third quarter financial press release showed some glimmers of hope.

  • Net sales in the third quarter of 2011 increased 6% to $26.1 million, a new quarterly record, compared with $24.5 million in the same period in 2010.  Year-to-date net sales increased $1.9 million, or 3% to $72.2 million, compared with $70.2 million in the same period of 2010.
  • Third quarter 2011 net income was $1.6 million, an increase of $205,000, or 14%, compared with $1.4 million of net income in the same period of 2010.  Year-to-date net income for 2011 was $3.5 million, a decrease of $1.5 million, or 30%, compared with $5.0 million of net income in the same period of 2010.
  • Diluted net income per share for the third quarter 2011 was $0.21 per diluted share compared with $0.18 per diluted share in the same period in 2010.  Year-to-date diluted net income per share for 2011 was $0.45 compared with $0.64 per diluted share for the same period of 2010.
  • Compared to the second quarter of 2011, net sales in the current quarter increased $2.7 million, or 12%, net income increased $450,000, or 38%, and diluted net income per share increased $0.05 per diluted share.

The company may now have given us more than a just glimmer of hope on the morning of November 10, 2011 as management announced a 100% increase its quarterly dividend to an annual rate of $0.80. This could tell us that above average growth may be right around the corner.

Prior to this dividend boost and based on the prior day’s closing price of $12.67, the market had assigned to TIS a dividend yield of about 3%. The stock’s price responded to the dividend news by rising sharply to $14.61. Even at the higher price, the dividend yield now stands at near 6%. Boosting the quarterly dividend could lead to a vote of confidence by investors who may now view TIS as less risky investment.

As the Orchids Paper story may now embody less "perceived" risk, we will be watching to see if the market will fill the dividend yield gap by lifting shares. Said differently, dividend yields can be a way that the market assigns risk premiums to companies. The higher the yield demanded by investors, the lower the price; dividend yield is calculated by dividing a company’s annual per share dividend by its stock price.

If the market was willing to price TIS with a yield of around 3% the day before the dividend increase and believes that the company’s risk profile has at least remained the same, it should reduce the new and current dividend yield of around 6% should once again approach 3%. Per the formula this would occur through an increase in the price of TIS shares.

  1. The fact that Orchids Paper increased its dividend over the course of one month into its fourth quarter and several days after the release of its 2011 third quarter financial results could indicate that the 2011 fourth quarter will be a good one. Comments in the dividend increase release were also positive.

    The company's President and Chief Executive Officer Bob Snyder said "Substantially increasing our dividend is reflective of our current performance and demonstrates the confidence that the Board of Directors has in our strategy and their continued optimistic outlook for the long-term growth of our Company. This dividend increase emphasizes our commitment to create long-term value for our stockholders."

  2. Analyst estimates indicate that TIS has a Geo Power Ranking ("GPR") of three (3), meaning that the company is expected to grow EPS by at least 20% to 30% for 3 consecutive quarters. This would come after a string of 6 subpar quarters.
Quarter 2012 EPS % Change 2011 EPS % Change 2010 EPS
March 0.19 Est. 137.5% 0.08 -55.5% 0.18
June 0.22 Est. 37.5% 0.16 -42.9% 0.28
September   tbd 0.21 10% 0.19
December   tbd 0.24 Est. 100% 0.12

In the end, we think that market could assign TIS a P/E of 25 on 2011 analyst estimates of $0.68. This would translate into a price of $17.00 and a dividend yield of 4.7% (~mid point between new yield and old yield). Again, the increase in the dividend should also create a new higher floor for TIS shares.

We listened to the replay of the 2011 third quarter conference call to gauge the potential risks as well as near-term growth opportunities. During the call, management indicated that the 2011 4th quarter will at least match the 2011 3rd quarter performance which would lead to quarterly YOY EPS growth of 75%.

Please note that

  • TIS shares were slightly trending down prior to today’s news.
  • We need more information on the company’s plans to ignite revenue growth.
  • The company has been facing rising raw material cost challenges.

Disclosure: I am long TIS.