In the modern era, paper and related products may not seem all that exciting. But it is sometimes the most boring types of businesses that offer the greatest opportunities. Case in point, we have a firm called Clearwater Paper Corporation (NYSE:CLW). This provider of tissue and bleached paperboard has demonstrated fairly steady revenue growth in recent years. Profitability has been all over the place, but cash flows have been quite robust. So far this year, financial performance for the enterprise has been somewhat disappointing. But if we assume an eventual return to normalcy, then shares might offer investors strong returns.
Clearwater Paper acts as a supplier of consumer tissue, parent role tissue, and bleached paperboard. At present, the company operates two key segments. The larger of these is called Consumer Products and is responsible for generating 55.3% of the company's revenue if we use 2020 data. Through this segment, the business provides a line of at home tissue products, small amounts of non-retail products, parent roles, and contract manufacturing and minor amounts of pulp. Products include bath tissue, with an emphasis on two-ply ultra and premium products. The company sells paper towels napkins, and other related products. Last year alone, products sold in the US tissue market accounted for 94% of that segment's sales.
The other segment the company operates is called Pulp and Paperboard. This particular segment accounts for the remaining 44.7% of the company's revenue. Through this, the business acts as a leading producer of solid bleached sulfate paperboard, hardwood and softwood pulp, and related products. The firm claims to be one of the four largest producers of bleach paperboard in North America with 15% of the available production capacity in the market controlled by it. Management claims that 45% of bleached paperboard used in North America goes to the construction of folding cartons. This is followed up by 26% that goes to cups and plates. And another 25% goes to liquid packaging.
Over the past few years, the company has seen fairly consistent revenue growth. However, it has not experienced revenue expansion every year. That said, between 2016 and 2020, revenue expanded from $1.74 billion to $1.87 billion. This is great to see, but it is important to note that 2021 is looking to be a soft year for the enterprise. For the first half of the year, revenue totaled $832.3 million. This represents a decline of 13.2% compared to the $958.5 million generated in the first half of 2020. A good portion of this decline appears to have been driven by lower volumes sold. In the second quarter of this year, for instance, shipments for Consumer Products came out to 10.2 million cases. This compares to the 16 million cases reported the same time last year and it is down from the 12.5 million cases experienced in the second quarter of 2019. It is even down from the 11.7 million cases experienced in the first quarter of this year.
Of course, not everything has been bad. For the Pulp and Paperboard segment, pricing added 11.2% to the company's EBITDA in the second quarter this year. However, the company did experience a major outage that cost at $22 million in EBITDA and increased costs hit it to the tune of $8.4 million. For the Consumer Products segment, the company solved volume hurt it to the tune of $40.8 million, while costs impacted it by another $6.2 million. Though these numbers provided refer to EBITDA over revenue, there was a revenue impact to them.
On the bottom line, the picture for Clearwater Paper has been rather mixed. As you can see in the chart above, net profits have been all over the place. However, operating cash flow has been more consistent. In four of the past five years, operating cash flow ranged from a low of $168.9 million to a high of $247 million. The real low point was in 2019 when the company achieved cash flow of just $55.6 million. If we adjust for changes in working capital, however, these numbers look even more consistent. In fact, they look similar to what we can see when looking at EBITDA.
As I mentioned already, financial performance so far this year has been soft. In the first half of the year, the company generated a net loss of $39.6 million. This compares to a profit the same time a year earlier of $33.1 million. Operating cash flow dropped from $120.4 million to $48.1 million. And EBITDA declined from $134.3 million to $69.1 million.
When it comes to pricing the business, how attractive the company is depends on which year we use. For instance, if we use the figures from 2020, the company is incredibly cheap. The firm would be trading at a price to operating cash flow multiple of 2.5. The same can be said if we adjust for changes in working capital. Meanwhile, the EV to EBITDA multiple of the firm stands at 4.5. All of this is made even better by the fact that the company's net leverage ratio is just 2.3. However, given that this year is likely to be worse than last year was, comparing the data to a prior year might make more sense. In the past five years, 2019 was the worst for the enterprise from a profitability perspective. Even with this, however, shares look appealing. The company would have a price to operating cash flow multiple of 10.9, which reduces to 5.1 if we adjust for changes in working capital. Meanwhile, the EV to EBITDA of the firm would come in at 7.6. Net leverage does increase considerably, climbing to 3.9. This is elevated, but not so high that the company is at material risk.
To put in perspective how the company is priced, I decided to compare its valuation to the five highest rated of its peers as defined by Seeking Alpha's Quant platform. On a price to operating cash flow basis, the companies ranged from a low of 1.4 to a high of 8.5. Of the group, only one company was cheaper than Clearwater Paper. However, if we use the 2019 figures, our prospect was the most expensive. I then did the same thing using the EV to EBITDA approach, ending up with a range of 1.5 to 21.7. In both cases, however, only one company was cheaper than our target.
At this point in time, the picture for Clearwater Paper is clearly confusing. On the one hand, using the data from 2020, shares of the enterprise are remarkably cheap. This is true even relative to the competition out there. Of course, this year is going to be weaker than last year was. So comparing it to the 2019 figures would show a company that is still cheap on an absolute basis, but it's definitely not cheap relative to its peers. Even so, the company does appear to offer some upside potential if you consider this down year to be a temporary thing. In four of the past five years, data was far more encouraging than this year is looking to be. So as long as the company reverts back to prior historical performance, it should make for a solid prospect for long term investors to consider.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.