Ennis, Inc. (NYSE: EBF) is a leading manufacturer of business forms and other business products and has been in the business for over 100 years. Simply put, the business is in the business of printing things, hence the slogan: "If it can be printed or printed on, Ennis has it." It operates 55 locations across the U.S. and more than 20 unique brands. While the company operates across two segments - print and apparel - the print business is considered core with a recent divestiture in the print segment which contributed about one-third of the company's revenues over each of the past three years.
In 2016, the company divested its Alstyle apparel business to Gildan (NYSE:GIL) for $110M with much of the proceeds used to pay a special dividend of $1.50/sh. Investors found the move controversial, on the one hand; there is "the bird in the hand" argument with some yield investors happy to receive the cash. On the other hand, some viewed it as a sign of a limited opportunity set and a shrinking of the business. The stock tanked following this asset sale to a low of about $14 in late 2016 with many of the investors with the latter mindset jumping off the wagon. Now that a full year has passed since the divestiture, we can begin to see a true picture of the current Ennis on a standalone basis.
Four Reasons you should buy Ennis:
1. Focusing on the core. While the market viewed the divestiture of Alstyle as a negative, we take a slightly different stance. This business was in decline and increasingly struggled to compete against global competition. Gildan was a natural buyer for the asset and was able to capture sizeable synergies, which meant it was also able to offer a very fair price. In our eyes Ennis made a great move, getting the right price before competition crushed margins. Paying the cash out in the form of a special dividend reduced the company's size and left the business much more tilted towards the print segment. We view this as a positive as margins are higher, the business is stickier, and most importantly, Ennis has a stronger competitive position than it did in apparel. Time will tell, but the most recent quarter did see Ennis' net income margin and gross profit margin hit highs.
2. The balance sheet is very clean. Ennis has $80M of cash and $30M of debt, which amounts to a substantial net cash position on a company with a market cap of $400M. The debt tranche is due in 2020 and carries a 2% interest rate (calculated as 2-month Libor plus 100 pts). Given low debt and interest payments, leverage concerns are non-existent. More interesting is the balance sheet optionality which would give the company an easy $180M of firepower if it chose to leverage up to 2x Net Debt/EBITDA, and this excludes the EBITDA that it would purchase in an acquisition. In the last annual report, management noted that the strong balance sheet will leave it in a position to take advantage of opportunities in the print market, which indicates it is at least open to making acquisitions. It is worth noting as well that the company owns 3.5M square feet of industrial space primarily for its manufacturing facilities as well as leasing another 1.5M square feet; operating commitments for this leased space is about $16M.
3. Dividend just got a bump. The stock now yields close to 5% following the announcement of a dividend increase to $0.20/sh per quarter from $0.175/sh. Considering where 10-year bond yields are, this is a very compelling dividend which should satisfy the income investing crowd. More important than the absolute increase in the dividend is the signal that it sends, management and the board of directors have sent the market a signal that the company can support a higher yield despite the divestiture of a good chunk of the business. Assuming an annual $0.80/sh dividend and EPS of $1.10 next year, we should see a payout ratio of 73%, which is high but easily sustainable.
4. Valuation is compelling. The business is spitting off over $50M of FCF and trades at a FCF yield in the mid-teens. P/E multiples are about 15x on what is expected to be $1.10/sh of EPS for the 2018 fiscal year. On an EV/EBITDA basis Ennis is trading at 6.9x compared to Cenveo (NYSE:CVO) at 8.2x, R.R. Donnelley (NASDAQ:RRD) at 8.3x, and ACCO Brands (NYSE:ACCO) (NYSE:ABD) at 8.6x. All of these comps are also potential buyers of Ennis if a takeout were to occur.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EBF over 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.