1 Obscure Stock Positioned for Market-Beating Returns
Pennsylvania small-cap paper products company P.H. Glatfelter (NYS: GLT) may remind some of the bumbling corporation Dunder Mifflin from the hit NBC sitcom The Office, but the similarities are in industry only. Any company that was founded during the Civil War and is still around to talk about it 150 years later is tough in my book. Glatfelter is a unique company with a lot of room to grow, and has the potential to one day be a stalwart in your portfolio.
How it's different
As far as paper companies go, Glatfelter is in an area of its own. Its niche is in high-margin, diversified paper products, and it has a heavy focus on innovation.
Glatfelter has three main business units, spanning an impressive array of products. Its "Specialty Papers" business (envelopes, digital imaging, postal) generates most of the revenues. "Composite Fibers" and "Advanced Airlaid Materials" constitute the rest of the company's operations. The former consists of things like coffee and tea filtration systems, while the latter busies itself with feminine hygiene and adult incontinence products, baby wipes, and the like.
For anyone who thought paper companies couldn't innovate, Glatfelter proves just the opposite. In each of the last three years, 50% of net sales came from products developed, enhanced, or improved within the past five years.
While this figure may be hard to believe, the numbers don't lie. Glatfelter's results and product diversity show that it's possible to be creative in an otherwise bland industry.
Quality of business
Of the worthwhile paper products companies on the market today, most pay a dividend. You can imagine why -- paper is in pretty steady demand, there are already a number of well-established companies in the area, it's a relatively low-margin business, and there are enough barriers to entry to make potential competitors reconsider a move into the sector. It's simply not easy for companies to move into the highly specialized, innovation-intensive part of the paper industry that Glatfelter occupies.
Glatfelter pays a 2.2% dividend. Investors may worry (and rightly so) that a small-cap paper company has no business paying a dividend -- it should focus on reinvesting in its own business for growth. But cautious investors shouldn't worry; the payout ratio is a mere 35%. In other words, Glatfelter only dispenses 35% of its earnings back to shareholders in the form of dividends, and the rest go back into the company.
Not only does Glatfelter focus on innovation by its 50% goal mentioned earlier, it also invests heavily in production facilities, maintenance, and new technologies so it can function more efficiently and cut costs down the line.
Fool Seth Jayson uses a metric called the cash conversion cycle to illustrate how quickly a business can turn capital into goods and services and back into capital again. Measured in days, the CCC is like a golf score: the lower, the better. In this respect Glatfelter is improving rapidly, going from a CCC of 85 in 2009 to 57 in 2011. That's progress!
No such thing as a risk-free investment
Of course, there's never been a "perfect stock," and Glatfelter is no exception. There are multiple larger players in the paper game already that have operations many times the size of Glatfelter's paltry $660 million cap, and if they're able to replicate, imitate, or otherwise -tate some of the Glatfeltian way of business, this company could be in trouble. International Paper (NYS: IP) is the largest direct competitor, and it pays a 3.1% dividend, so already it's competing with Glatfelter for investors.
But in terms of size, at least, International Paper isn't comparable. Its $14.2 billion market cap makes it the largest paper products company in the world -- more than four times the size of more comparable domestic competitor Sonoco Products (NYS: SON) , which has a $3 billion market cap. While Sonoco is closer to Glatfelter's size, it focuses on a wide variety of packaging services outside of the paper realm.
So Glatfelter can offer what these other companies can't: a mix of growth and income. In its most recent quarter, earnings were up nearly 500% from the year before. Combined with an above-average dividend and steady revenue growth, Glatfelter appears well suited to benefit shareholders.
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The article 1 Obscure Stock Positioned for Market-Beating Returns originally appeared on Fool.com.Fool contributorJohn Divineowns none of the stocks mentioned in the story above, but he went to school with a kid who was strangely obsessed with Glatfelter products. You can follow him on Twitter@divinebizkidand on Motley Fool CAPS@TMFDivine.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.