Tredegar (TG)

Tredegar Corp (TG)

Key Statistics

Enterprise Value = $787.53 million

Operating Income = $42.47 million

EV/Operating Income = 18x

Price/Revenue = .7x

Earnings Yield = 9%

Debt/Equity = 47%

Debt/EBITDA = 2.21x

The Company

Tredegar is a manufacturer of polyethylene plastic films, polyester films, and aluminum extrusions. Aluminum extrusions are used in the construction and automotive sectors, so they benefit directly when the economy is expanding and are highly cyclical.  The plastic films are used mainly for hygiene products like diapers and feminine products.

Sentiment

The market is largely indifferent to this company.  Since the early 2000s, the stock has been stuck in a trading range between $13 and peaking around $25-$30. The price is currently at $18.90 and is down 21.25% YTD. Revenues and operating income have been in decline since 2013, which have contributed to the downward pressure in the stock price.

My take

One of the main strengths of the company is that it is has a large insider ownership, currently at 22%. This creates strong incentives to steady the course of the company.  On the negative side, the aluminum extrusion business is prone to the cyclicality of the US economy. In other words, a recession would seriously hurt this company.  Also on the negative side, the business of plastic films is also highly dependent on purchases from Procter & Gamble, who decided a year ago to diversify their supplier base and this hurt Tredegar’s sales.  Hopefully, the company will find new sources of sales and P&G won’t cut anymore.

On an EV/EBIT basis, the stock looks expensive, but it still has an attractive earnings yield and is cheap on a price/sales basis.  Much of the high EV/EBIT valuation is due to the fact that operating income has been diminished by the loss of revenue to Procter & Gamble and the fact that the company has a low cash stockpile. With that said, the overall debt/equity and debt/EBITDA ratios are relatively low.

I’m encouraged that the company is making efforts to cut costs by moving more domestic manufacturing to its Lake Zurich, IL facility.  I also believe the aluminum extrusion business will continue to expand, as a recession appears to be unlikely in the upcoming year.  Possible catalysts that could move the stock higher include: (1) the cost-cutting measures that have been depressing earnings start paying off, or (2) more customers are found outside of Procter & Gamble.  The high level of insider ownership implies to me that management will likely push hard for measures to turn the firm around.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.