VKSC,
I saw you liked this because of the high ROE, low PE, and the high Icahn ownership. At first glance, this looks like an interesting buy. Growing sales, low PE, expanding into Asia with a new plant expected in 2012, smart lead investor.
However, there is substantial risk to this and a comparison to cash looks inappropriate given the high risk in the stock.
Issues
They have a high ROE because book value is minimal, 0.47 per share.
They have over $200 million in debt on which they are paying at 9.875%. They are paying more yearly on their debt than their book value. Debt-to-equity is more than 10x, talk about leverage.
Icahn is not only a shareholder, but a lender. As a lender, he could negotiate favorable investment terms for himself that could leave other shareholders in the lurch.
Large negative free cash flows due to investment in their Asia business. Given their leveraged balance sheet, this is somewhat worrisome. 2012 is probably going to be another negative free cash flow, as they expect to spend $20 million on new plants.
Exposure to commodity price risk of increased raw materials such as pulp, which they say has a 20% inflation rate.
They have a lawsuit against that looks like it will wrap up favorably (only appeals rulings now), but still an uncertainty.
They have pension obligations and assume a 8% return on their pension (a bit high for my taste).
The stock is a "roach motel" pink sheet stock -- you can check in, but if things go bad you might not be able to sell decent volume at anywhere near a fair price.
MC |
