Previously, I wrote about Verso (NYSE:VRS) in the article titled "Verso Corporation: Value/Growth Opportunity At A Great Price!" Since then, there have been a few interesting developments that continue to make this a great opportunity.
My thesis on Verso suggested it was undervalued according to book value. This thesis has not changed and, in fact, has gotten stronger from the previous two quarters of profitability. Since that time the book value increased to $21.65, a 24% discount from its current price of $16.35. Why then has the stock been flat over the previous months? Macroeconomic trends and current market volatility offer only a partial explanation; there is also another reason.
Verso Investor Sells Large Chunk of Holdings
Since the beginning of January 2018, Mudrick Capital Management has sold over 1.8 million shares of Verso at a valuation of over $30 million. This investor previously owned more than 10% of Verso and has been aggressively reducing their position size.
What is the reason behind the sales of these shares? Mudrick stated in their SEC filing that they were frustrated with the rate of returns that Verso was producing. Verso previously sold a hydroelectric power plant in the area and Mudrick has been pushing for the sale of the Androscoggin Mill as well. Their belief is that the sale of the mill will push the company even further into profitability. However, Verso wants to keep the mill and increase its production capacity to keep up with increasing demand.
The sale of shares from Mudrick has kept Verso from pushing into the $20 range. In fact, since it went under 10% ownership of Verso it is not required to submit SEC Form 4. It is still unloading shares even into April 2018. It currently owns close to 1% of Verso and should be fully unloaded before the end of April. It's unclear if there is an alternative motive for Mudrick's sale of Verso shares. Mudrick holds only three positions in its own portfolio, one of them being Verso. It will be interesting to see what Mudrick will replace its Verso investment with.
Mudrick has kept Verso's valuation relatively flat over 2018 Q1. This flat valuation will be short lived as a number of opportunities will continue to push the stock price higher.
Verso Forms Strategic Alternatives Committee
Verso formed a strategic alternatives committee just after Mudrick decided to sell its shares. It's hard to tell whether this was done as a reaction to Mudrick's sale of a large chunk of the company, or if this was already part of the plan. Whatever the reason, this is a perfect example of how an undervalued company can revert to the mean. While Mudrick has sold the company, it has motivated Verso to act.
Shareholders have yet to see where this committee will move the company, but this is an extremely good position for investors to be in. A number of things can happen:
- The sale of some of its assets to increase its cash value
- A sale of the entire company
This could be a huge windfall for investors as a larger company would guarantee the cash flow in an uncertain paper industry.
Verso Earnings Growth Produces Strong Tailwinds
Verso announced an amazing fourth quarter and expectation of strong performance moving into 2018! From Q3-Q4 2017, Verso produced earnings growth of 324.10%. Building on its previous quarter's success, it increased its profitability yet again. The lackluster performance on the open market in Q1 2018 is frustrating, but as stated above is most likely associated with Mudrick's large sale of Verso stock.
Along with Verso's large increase in EPS, there is also a small share dilution. This is associated with it's performance incentive plan. The diluted weighted shares outstanding have gone from 34.46M to 34.47M. This may be a small increase, but it is still important to keep track of any increase in shares outstanding.
Verso needs to produce a positive year, and I firmly believe 2018 will be a full year of positive earnings. Currently, Verso has a forward P/E of 9.21 and is paying down debt at a rapid pace. Because of the large increase in cash flow, Verso is obligated to pay down $43 million more debt in the first quarter of 2018. Next quarter's balance sheet should reflect this and show an even stronger debt/equity ratio.
Verso is in a good position and it continues to strengthen. However, there are still multiple risks that investors should be made aware of. The paper and media materials industry are in a secular decline. There will always be a need for paper media, but it will never be a fast growing industry. There is opportunity in its current price, but this might shift fast if there are heavy price fluctuations.
Verso is very elastic on price fluctuations and especially vulnerable to a rise in the value of the dollar, especially in relation to the euro. The YTD change in the USD/EUR is -2.26%, implying a good situation for Verso to be in since the USD is declining. Along with a booming economy, and protectionist policies this should allow for Verso to continue to produce profits.
Verso's stock price has been relatively flat during the first quarter of 2018. This is largely due to the sale of a large portion of the company by Mudrick. Once Mudrick is fully out of the stock, it will be an especially great opportunity for small-cap investors to ride the wave up to fair value and possibly beyond. Verso is expected to do incredibly well in 2018 thanks to its strengthening cash flow and debt positions.
Disclosure: I am/we are long VRS.
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.