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Neenah Paper Reshuffles Its Deck

If there is an association of generally terrible industries for long-term investors, paper would have to be a member in good standing. But just as Southwest and Ryanair have proved in the generally terrible airline industry, exceptional companies can rise above their peers. That should encourage stockholders of Motley Fool Hidden Gems recommendation Neenah Paper (NYSE: NP  ) .

Though results at this papermaker topped expectations for the second quarter, I wouldn't call them "great." Revenue was up 10%, but margins were down. Adjusted operating income fell about 12%, while adjusted profits per share were about 8% lower than the year-ago level.

Performance was likewise mixed on a segment basis. Sales ticked up slightly in fine papers and down a bit in technical products, but operating profits were lower in each category, due principally to higher input costs. Those costs have been affecting everyone from International Paper (NYSE: IP  ) to Packaging Corporation of America (NYSE: PKG  ) , to some extent. And though pulp sales were reported much higher, profits here were also down on an adjusted basis.

I'm encouraged, however, that Neenah's management is shuffling the deck to try to get a better array of productive assets. The company has sold relatively nonproductive timberland in Nova Scotia, reached an agreement to get rid of the money-losing Terrace Bay mill, and announced a $218 million acquisition for some specialty paper assets in Germany. That positions Neenah toward higher-margin/higher-return products, and away from more commoditized offerings. Not a bad shift, if you ask me.

There are several more interesting ideas in the wider paper/forest-products sector, but Neenah isn't too far behind. Management seems focused on maximizing the potential of the business and building a collection of assets that can deliver satisfactory cash flows for the long haul. That's not a bad goal to have, and investors who stick around may be pleased with the ultimate outcome.

For further Foolishness, check out:

What made Tom Gardner interested in Neenah Paper for subscribers ofHidden Gems? Take a free 30-day trial to find out. You can also see the service's current recommendations as well as enjoy exclusive interviews with executives and legendary investors.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Related Tickers

10/21/2016 4:02 PM
NP $80.70 Up +0.05 +0.06%
Neenah Paper CAPS Rating: ****
IP $47.00 Down -0.18 -0.38%
International Pape… CAPS Rating: ****
PKG $81.54 Up +0.41 +0.51%
Packaging Corporat… CAPS Rating: *****