KapStone Paper Has Been on a Tear Lately

Legendary investor Peter Lynch suggested that investors "invest in what they know" and they should look for small, boring businesses that provide consistent performance over the years. It should be easy to understand and easy to explain. In other words, look for unloved, underappreciated stocks. I believe that KapStone Paper and Products (NYSE: KS  ) meets these requirements.

Founded in 2005, the company went public in 2007, making it the new kid on the block. It is a maker of containerboard, corrugated products and also specialty paper products. Corrugated boxes are basically the same type of box that consumers receive from Amazon.com and other online retailers. As online retailers continue to chip away at the brick-and-mortar competition, sales will increase, and result in more boxes shipped. It is also the largest U.S. producer of kraft paper in the United States, which is a key component needed to create bags for agricultural goods, pet food, baking products, and cement.

Kapstone Paper Acquires Longview Fibre. Source: Bill Wagner, The Daily News

Growth via acquisitons
The company has made strategic acquisitions, including U.S. Corrugated in 2011 for $330 million and Longview Fibre in 2013 for $1 billion. These are both sizable acquisitions for a company that currently boasts around a $3 billion market cap. The Longview acquisition provides scale, resources and a national footprint into the containerboard space. KapStone now has a presence in many strategic regions in the U.S.

First quarter 2014 results were very strong. Revenue was $549 million, an increase of 72%, and net income rose 74%. These are pretty solid results following severe weather. The storms resulted in lower production volumes. However, there were several mentions from the management team about optimizing existing plants to lower costs and improve efficiency. The company spent $45 million in machine upgrades along with a $4 million reduction in annual personnel costs. These actions will benefit the company in the long term by lowering input costs, leading to higher margins. .

Takeaways
If investors are looking for a small company in the paper products industry, then KapStone is a good choice. Generally, companies in this industry pay investors a generous dividend, such as Packaging Corporation of America (NYSE: PKG  ) and International Paper (NYSE: IP  ) These larger companies currently have generous dividend yields between 2%-3%, but at the expense of slower growth. Choosing a company depends on the goals and expectations of the investor.

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