Tic-tac-toe, investors want to know: After beating estimates in the fourth quarter of 2006, and blowing them entirely out of the water in the first quarter of 2007, will Neenah Paper (NYSE:NP) make it three in a row for earnings beats when it reports on its second quarter for 2007 Wednesday afternoon?

What analysts say:

  • Buy, sell, or waffle? Still only two analysts follow Neenah. One continues to rate it a hold, but megabank Citigroup upped Neenah to a buy after last quarter's blowout.
  • Revenues. One of these analysts (which one is not specified on Yahoo! Finance) expects to see revenues rise 58% to $226 million.
  • Earnings. One analyst guesses $0.52 per share for profits, and the other $0.55, making the "consensus" about $0.53 per share, for a 7% drop.

What management says:
Reading between the lines, I have to wonder whether two press releases put out by Neenah, while one month apart chronologically, are, in fact, more closely linked factually. In May, Neenah informed investors that its former head of fine-paper operations, William O'Connor, who has been with Neenah since it was still part of Kimberly Clark (NYSE:KMB), is leaving the company -- and that this division will hereafter report directly to CEO Sean Erwin.

Might O'Connor have disagreed with Erwin's decision to shrink his bailiwick? Neenah did some pruning on the fine-paper side of the business soon after the departure. In June, the company announced it will "permanently close its fine-paper mill located in Urbana, Ohio," which "was acquired by the company with the purchase of Fox River Paper in March 2007." Management says the closure will "maximize cost efficiencies by shifting fine paper manufacturing to utilize existing available capacity at the company's other high quality mills ... further [improving] costs and margins" in the long term.

Short term, however, Neenah anticipates cash outlays of about $4 million for severance and related costs -- but not necessarily in Q2, as it will take about a year to wind down operations at the mill.

What management does:
Meanwhile, margins are indeed turning around at Neenah. For two straight quarters (incidentally, the very two that surprised the analysts), Neenah's rolling margins have grown at each of the gross, operating, and net levels. At last report, the company's operating margins exceeded those achieved by each of its industry rivals: International Paper (NYSE:IP), Wassau Paper (NYSE:WPP), Weyerhaeuser (NYSE:WY), and MeadWestvaco (NYSE:MWV).





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fool co-founder Tom Gardner recommended Neenah Paper to Motley Fool Hidden Gems members more than two years ago. What does he think about Neenah's careful pruning of the fine-paper tree? Well, in his last update to Gemmers, Tom reminded us that Neenah is actually shutting down not just the Urbana operation, but also two manufacturing plants over the next year, and is consolidating production at other plants. Tom calls this "a good business decision, but unfortunate for the now-surplus workers."

As for the decision that faces you -- namely, whether to buy Neenah at today's price or wait for a cheaper buy-in point -- Tom names his ideal target price in the update. To find out what price Tom thinks is fair, take a free, 30-day trial of the service, and see what else Motley Fool Hidden Gems has to offer. Click here to start.

What did we expect out of Neenah Paper, and what did we get?

Fool contributor Rich Smith does not own shares of any company named above.