Neenah Paper (NYSE:NP), a Motley Fool Hidden Gems recommendation, is a tricky little stock to evaluate.
On one hand, it's tough to call its recent performance anything but terrible, particularly compared with analysts' expectations. On the other hand, this company does have valuable assets, and management seems to still seek ways of cutting costs.
Performance this quarter wasn't pretty. Total revenue rose just 1%, and the company reversed a year-ago operating profit into a loss. While reported net income (or, rather, net loss) was magnified by charges, adjusting out those expenses doesn't really make the picture any prettier. However, the company did manage to squeak out a small but positive amount of structural free cash flow for the year.
Ironically, a recent strike may have given the company a break. Workers tied to the unprofitable Terrace Bay mill went on strike at the end of January, and the company has since closed the plant. The SEC document that the company filed says that an ongoing shutdown of the mill would have a "material impact" on the business -- but not a "material adverse impact." From the company's statements, it almost sounds to me like a prolonged shutdown of this money-losing mill might be good for Neenah and its investors.
True, pulp is a very tough business, and the company still has one pulp mill operating. But even here, the company seems to be considering selling off some of its timberlands and finding other ways to keep the mill running competitively. How much will it get for the timber? I have no idea, and that's part of the risk of building an investment thesis from the value of underlying assets.
I don't think Neenah Paper is doomed, especially since a recent renegotiation with Kimberly Clark (NYSE:KMB) will spare them from paying penalties tied to the closure of Terrace Mill. The company's assets still have value -- probably more than the current stock price reflects. But I'd rather not invest in paper at all, and if I really had to, I'd be more interested in UPM-Kymmene (NYSE:UPM), AbitibiConsolidated (NYSE:ABY), or paperboard companies such as Packaging Corp (NYSE:PKG) and Smurfit-Stone (NASDAQ:SSCC).
Further Foolishness unfolds:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
