Supply chain management. Printing. Imaging. Health-care products.
What do these businesses have in common? First of all, most investors couldn't give a rip about any of them. Not talking about next-generation proton acceleration devices? Not interested.
And second: Wisconsin-based BantaCorp. (NYSE:BN) does all of them and generates substantial economic gains in the process. Why have you never heard of Banta before? See above. It has more than $1.3 billion in revenues, is valued at $850 million, and has exactly one investment bank analyst following the company.
Don't like the madness of crowds? Banta's a good thing, because there may not have been a crowd in these parts -- ever. But this is just the kind of simple business that I really like. It's Church & Dwight (NYSE:CHD) baking-soda simple. These companies are the opposite of a Sun Microsystems (NASDAQ:SUNW) or a Netflix (NASDAQ:NFLX) -- companies that are on top of the world in exciting businesses, and thus have armies of smart people plotting their overthrow. How many folks out there are gunning to knock down a printing company?
Banta is comprised of several essentially unrelated companies run under a single corporate parent, each with its own profit and loss responsibilities and not much mixing in between. In many circumstances, these types of businesses give me pause -- they often smell like what Peter Lynch called "deworsifications," or are telltale signs of companies that have generated capital but lacked the discipline to make good capital decisions.
This company, however, doesn't give off that same vibe. It's been around for more than a century, and seems to possess the gravitas of one that has seen business fads come and go. Its managers are not opposed to making further acquisitions, but have a stable roster of companies that they allow to operate in some form of autonomy.
In fact, Banta has a decentralized culture and doesn't really bother with trying to force its businesses into finding "synergies" or other MBA-inspired nonsense. Just make money, baby. The company refers to its culture as "dual focus." It has a printing business and it has a supply chain management business, and the managers of each one is responsible for performance.
There's no "e" in "cash flow"
Given that both businesses are fairly staid, Banta's price-to-earnings ratio of 14 might not seem to offer much in the way of opportunity. But the printing business is asset-intensive, and with those assets comes big depreciation each year. In 2002, Banta had total depreciation of more than $52 million. That would give the company (if such a ratio had much meaning at all) a price-to-depreciation level of 16. What that also means is that its reported earnings are grossly distorted by depreciation, which is a non-cash line item.
This is borne out on the cash flow statement, which gives a substantially better picture of Banta's economic performance. In the last three years, it has churned out free cash flow of $120 million, $128 million, and $21 million, respectively. (The company had large working capital increases in 2000, depressing free cash flow.)
Such large amounts of free cash flow are great, of course. Having a free cash flow multiple of 7, even more so. But again, the fact that the company has such substantial depreciation each year means that we need to make sure that it's not generating free cash flow for a few years only to have to blow it back out the door to finance massive equipment upgrades in other years.
Making money from zero
But there's an ill-kept secret in financial accounting rules and depreciation: Sometimes the amount that companies subtract from the value of their physical plant bears little resemblance to the plant's actual lifespan.
In Banta's case, much of its capital equipment is in the form of printing presses -- its supply chain management business requires almost no capital equipment. Gerald Henseler, its CFO, explains that though their presses are generally depreciated on a 10-year basis, in some cases the company has 25-year-old equipment that still operates and meets its needs. He adds that Banta's market -- it prints over 900 different trade magazines -- is primarily short run in nature. Unlike long-run applications such as catalogs, the speed of the system is not as crucial, so even though Banta runs some outdated printing equipment by several generations, these pieces suit the company's needs just fine.
The biggest issue with Banta seems to be that its revenues have shrunk over the last few years. This is, of course, a concern. It has to do with the company's biggest cyclical exposure -- the advertising market -- and the fact that this particular market is in the midst of a multi-year slump. This costs Banta twice: Its variable costs make up a tiny proportion of its total cost structure, so the company not only misses out on additional revenue, but also has to pay to maintain equipment whether it operates or not.
On the other hand, with low variable costs comes an enormous advantage: Once the fixed costs are met, each marginal dollar of revenue generates enormous amounts of profit. In Banta's case, Henseler says that for each marginal dollar, the bottom line before taxes is as high as $0.78. That's spectacular.
Banta is not likely to be a moonshot stock. And even though the company has increased its dividend for 26 consecutive years, its yield at current prices stands only slightly above 2%. Given that it produces so much more than this in free cash, investors have to hope that its decisions to deploy the remainder of that capital are sober.
An uptick in the advertising business could provide Banta with a tailwind for its core printing business, something that the company has had to do without for several years. When (not if) this occurs, Banta's cash generation ability could really turn a few heads.
Fool on!
Bill Mann realized he had lost the argument with his three-year-old when he heard himself saying: "OK, you don't have to finish your cereal, but just finish your cake." Bill does not own shares of any companies mentioned in this article. To learn about more companies like Banta, be sure to consider Tom Gardner's Motley Fool Hidden Gems. The Fool is investorswriting for investors.
