Corsair Capital Now Owns 5.6% of This Paper Company

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A 13G filed with the SEC has reported that Corsair Capital Management, which is managed by Jay Petschek and Steven Major, owns 2.8 million shares of $530 million market cap paper products company Wausau Paper Corp. (NYSE: WPP). While the market capitalization is below $1 billion, on average about 240,000 shares are traded daily, and with a current stock price over $10.50 there is over $2 million in daily dollar volume.

We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies, so we can see that at the beginning of January Corsair had only owned about 140,000 shares of Wausau (See more of Corsair's stock picks).

Specifically, Wausau Paper Corp. operates in two business segments. Its consumer products business produces tissue paper and paper towels; the company also has a specialty papers business. Total revenue was about flat last year compared to 2011, and overall has barely grown at all in the past few years; in fact, sales were lower in 2012 than they were in 2008. The company was barely profitable when a number of special charges are included; even after these charges are added back, earnings do not look particularly high relative to the valuation. In addition, Wausau continues to announce plant closures that will require special items for some time, though in the long run they should improve the profitability of the business at least relative to what it otherwise would have been.

Analyst consensus for 2014 implies a forward P/E of 21. That seems like an aggressive valuation, implying decent earnings growth in the several years following that time--assuming the company even hits analyst targets--while the top line seems stagnant. Jeffrey Smith’s Starboard Value reported a position of 7.3 million shares of Wausau at the end of December; note that this gives the fund quite a large percentage stake.

We can compare Wausau to peers such as International Paper Company (NYSE: IP), Clearwater Paper Corp (NYSE: CLW), Domtar Corp (NYSE: UFS), and KapStone Paper and Packaging Corp. (NYSE: KS). All of these companies look to be in a better position in terms of profitability, though International Paper and KapStone both carry trailing P/Es of over 20. In the case of International Paper, the Street is expecting a rapid recovery: the stock is trading at only 10 times forward earnings estimates, with expectations for continued growth yielding a five-year PEG ratio of 0.4. We’d be quite wary of investing in the paper industry, but with revenue up 11% in the fourth quarter of 2012 versus a year earlier the company looks worthy of further research. KapStone is in a similar position, at least in the short term, as the forward P/E is also close to 10. That company has also been turning in good sales numbers, though it (as with all the other peers) is much smaller than International Paper in terms of market cap.

Clearwater and Domtar carry trailing earnings multiples in the teens, so growth standards there are lower than at the other three companies. Revenue numbers at each company were actually down slightly in their most recent quarter compared to the same period in the previous year. In the case of Domtar, this was accompanied by a 69% decrease in net income over the same time frame; between that and the revenue numbers we think that International Paper and possibly Kapstone would be better prospects even given the higher earnings multiples at those companies. Clearwater recorded a high percentage increase in earnings, but over time we would expect bottom line growth to converge to that of the top line. Those figures are lagging, and the advantage in terms of trailing P/E is narrow.

As a result we would say that these two companies seem too unstable at this time, while Wasau is too speculative. KapStone does look good in terms of its financials, but if we had to look at a paper company International Paper would be our first pick given its considerably larger size. The valuation does look high, however, so we would need to be convinced that analysts are on to something with their earnings projections.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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