It might be a good sign that KapStone Paper and Packaging is
coming off one of its best quarters ever, yet management says the
company still could have done better.
) makes and sells containerboard, corrugated products and
specialty paper products in the U.S. and internationally.
It is the country's largest producer of kraft paper, used to
produce bags for agricultural products, pet food, baking
products, cement and chemicals, and grocery bags. The company's
subsidiaries operate four paper mills and 22 converting plants in
KapStone was formed in 2005 and went public two years later.
Since then, it has built a record of steady revenue growth and
robust profits, with only the occasional hiccup.
The company recently
made it onto
the IBD 50 list of top-rated growth stocks.
Profit And Potential
Last year the company's annual earnings doubled from the prior
year. Revenue grew 44% -- its biggest top-line gain since
Fourth-quarter results were even more impressive: EPS climbed
221% year-over-year, while revenue increased 87%.
On a Q4 conference call, CEO Roger Stone called it "a great
quarter and year" -- just before conceding that "it could have
"Along with two mill plant shutdowns in the fourth quarter,
one of our mills experienced serious productivity issues, which
have now been resolved," Stone said.
The plant shutdowns were due to temporary operational issues.
Another problem, Stone said, was that the company's product mix
was "substantially poor." Demand for higher-priced products was
low, and KapStone produced a large volume of cheaper unbleached
pulp to help fill in the gap.
The good news? "Demand in our mix has returned to normal, and
our January prices were actually $23 a ton higher than December's
prices," Stone said.
That bodes well for a company that has delivered two straight
quarters of triple-digit EPS growth and 74%-or-better sales
KapStone has benefited from industry trends as well as
internal decisions, analysts say.
From an industry standpoint, the main growth driver has been
rising prices of goods KapStone sells -- particularly
containerboard, which accounts for about 63% of the company's
"There has been some consolidation in the corrugated box
industry, and the industry has been more rational about managing
supply and demand," said Al Kabili, analyst at Macquarie
Securities. "As a result, the industry has been able to raise
pricing for containerboard, which ultimately leads to higher
prices for corrugated boxes."
He says containerboard prices have risen nearly 20% since
2012. While industrywide sales volumes have largely been flat
over the last year or so, KapStone has managed to deliver volume
growth in the mid-single digits.
"KapStone has and will continue to outperform the industry in
terms of volume growth," Kabili said.
That's mainly because while larger rivals such asInternational
) andRock-Tenn (
) focus on large national accounts, KapStone focuses on smaller
These accounts "tend to be the ones that are growing the
fastest vs. the national accounts," he said.
Meanwhile, KapStone should get an additional boost from its
recent announcement to implement a $50-per-ton price increase on
kraft paper, which makes up about 37% of KapStone's business.
"We expect the full benefit of this increase by mid-second
quarter 2014, and we expect the annualized benefit from this
increase to be approximately $30 million," Chief Financial
Officer Andrea Tarbox said on the Q4 conference call.
Analyst Kabili reckons there is still more room to raise
prices in coming quarters.
"I don't think we're at peak pricing in the current cycle," he
said. "Once volumes pick up for the broader industry, it's
logical to think we'll see additional price increases."
KapStone has also benefited from a couple of acquisitions that
have worked out well.
In October 2011 it paid $330 million to buy U.S. Corrugated,
owner of a 240,000-ton recycled containerboard paper mill in
Cowpens, S.C., and 14 converting facilities in the East and
More recently, KapStone in July bought Longview Fibre Paper
and Packaging from a private equity firm for $1.025 billion in
cash. Longview, a maker of containerboard, specialty kraft
papers, corrugated containers and other gear, has operations in
the Pacific Northwest, helping KapStone expand its operation west
of the Mississippi River.
"The Longview deal gave them a West Coast presence, which
widens their geographic profile," Kabili said. "Now, for the
first time, they have a national footprint."
During its first five and a half months under the KapStone
umbrella, the Longview business added $440 million in revenue and
$116 million of adjusted EBITDA.
"The Longview Fibre deal continues to be a home run," Steven
Chercover, analyst at D.A. Davidson, said in a report. "With only
half of the $18 million in synergies recognized so far,
operational improvements could yield another $20 million."
During the 2013 fourth quarter, the Longview business produced
28 cents of adjusted diluted earnings per share. Overall EPS for
the quarter came in at 45 cents, up from 14 cents the prior year.
Revenue gained 87% to $563 million.
Analysts polled by Thomson Reuters expect first-quarter EPS of
45 cents, up from 21 cents a year earlier. Full-year profit is
seen rising 61% in 2014 and 10% in 2015.
KapStone stock set a record high of 32.82 on March 6 and
currently trades near 30.
International Paper, Rock-Tenn,Packaging Corp. of America (
) andMeadwestvaco (
) are the largest companies by market cap in IBD's Paper &
Paper Products industry group, ranked No. 37 of 197 groups.
KapStone is eighth in size.