Domtar (UFS)


Key Statistics

Enterprise Value = $3.014 billion

Operating Income = $454 million

EV/Operating Income = 6.63x

Earnings Yield = 13%

Price/Revenue = .4x

Debt/Equity = 37%

The Company

Domtar is a paper company. They sell paper products, like copy paper. They also sell personal care paper-based products, like diapers and toilet paper. They are the largest manufacturer of freesheet paper in North America, operating 10 paper mills that produce 3 million tons of uncoated freesheet paper per year. 77% of their production is in the US and the rest occurs in Canada. They also produce 1.8 million tons of pulp per year, with production also divided between the US and Canada. Pulp is derived from separating fiber from wood, which is a raw material used to make a variety of paper products.

The 52-week high for Domtar is $53.89 and a return to these levels would represent a 54% increase in the stock price. The stock is under pressure for the typical small cap value reason this year: trade jitters. Domtar has most of their production operation in the United States and they sell overseas. 58% of their pulp revenue, for instance, is derived from foreign markets. This makes them sensitive to the worries about trade, tariffs, and Trump tweets. The strong US dollar has not helped the stock, either.

At current levels, it is cheap by every measure. EV/EBIT is 6.63x, price/sales is .4x, it is below book value, it is only at 108% of tangible book value, and it is trading at 3.8x cash flow.

My Take

I like boring stocks, and it doesn’t get much more boring than copy paper, tissues, and toilet paper.

This is a stable, mature, company that is not growing significantly, which is why the stock boasts a high dividend yield. For the last 10 years, revenue has floated around $5 billion to $5.8 billion. It has consistently made money for each of the last 10 years, with the exception of 2017, a year in which they lost $4.11 per share. Even though they lost money that year, it was not tied to the actual performance of the business. This loss was related to the change in the tax law that year and was a one time expense. This year, the trade war hasn’t significantly impacted the actual revenues, earnings, and cash flows of the company. The movement in the stock looks to me like an overreaction to the scary headlines.

At some point, this trade war is going to be resolved. My expectation is that once that happens, regardless of the actual outcome, stocks like Domtar will rally just because it’s over with. The market just needs a resolution. It doesn’t even have to be a good resolution. This might seem endless, but at some point, this will go away one way or another.

Domtar’s core, boring, business is not going anywhere or changing any time soon. Diaper use isn’t going to decline because of a trade war tweet. Diapers can’t be disrupted by some money losing startup backed by venture capital cash. In fact, adult diapers are likely a growth industry considering the fact that the senior population globally will continue to expand as life expectancy increases. Copy paper isn’t going anywhere, either. People have been talking about paperless offices (Captain Picard only used his iPad with the LCARS O/S) since I was a kid and paper doesn’t seem to go away. The persistence of the paper market is reflected in Domtar’s stability in earnings and cash flow.

Meanwhile, while I wait for the stock to snap back to a normal multiples, I will be paid a nice 5.22% dividend yield. Domtar’s strong free cash flow also suggests that this dividend can be sustained.

Like everyone else, I am worried about the probability of recession, so I considered Domtar’s performance during the last crisis before I purchased the stock. Domtar continued to earn money during the last recession, making a profit of $3.59 per share in 2009. The stock reacted more violently than the actual business to the recession, falling from $100 per share to $30. I don’t think this will happen again if we face another recession because Domtar is much cheaper today than it was back in 2007. Going into the last recession, Domtar traded at a much higher valuation. In 2007, it traded at 1.5x book value and today it trades at .84x book. Going into that crisis, Domtar was also much more leveraged with a debt/equity ratio that was over 100%. Today, debt/equity is only 37%.

Domtar has a high degree of financial quality. The Altman Z-Score of 2.34 implies that the company is not in distress. The Piotroski F-Score of 7 also exhibits a high degree of financial strength. The debt/equity ratio of 37% is also at a low and safe level. The Beneish M-Score of -2.68 implies that the company is not an earnings manipulator.

Domtar trades at a discount to its competitors and its history. The current P/E of 7.74 compares to a 5-year average of of 14 for the stock, which seems right for a mature company that isn’t expected to change much and pays a high dividend yield. An increase to this level would be an increase of 80% in the stock price. The average P/E for the industry is 16.45. The current EV/EBIT multiple of 6.63 compares to a 5-year average of 14.16 for the stock. On a price/sales basis, the current .40x level compares to an industry average of .63x and a 5-year average for Domtar of .50x.

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.

Insight Enterprises (NSIT)


Key Statistics

Enterprise Value = $2.135 billion

Operating Income = $243 million

EV/Operating Income = 8.78x

Earnings Yield = 9%

Price/Revenue = .27x

Debt/Equity = 45%

The Company

Insight Enterprises is an Arizona-based tech company founded in 1988. They operate globally, but their focus is on North America, where 76% of their sales originate. They provide tech solutions to business clients that run the gamut: supply chain optimization, connecting workforces, cloud and data centers, and the vague “digital innovation.”

Insight provides tech solutions for businesses, so they don’t have to do all of the work themselves. A company can pay Insight Enterprises, and procure their hardware, software, set up a secure cloud, set up remote work for their employees to collaborate, etc. If you’re running a large, complex, organization – it can be extremely costly to figure out how to complete all of this from scratch. It’s far more efficient to hire an expert like Insight to do it all for you.

Supply chain optimization is a service they offer to businesses to deploy hardware and software for the client. The procure and configure hardware and software for companies. Connected workforce translates to helping companies operate on the cloud, encourage employees to work on multiple platforms. Insight also provides security for these solutions. Businesses come to Insight with tech problems, and Insight offers solutions. For their cloud solutions, they provide robust security services and infrastructure management.

Digital innovation is a custom tech consulting service. Clients can go to Insight with a unique problem and see if Insight can develop a tech solution. For example, Insight can help if you’re running a hospital and need a system to predict how many nurses you need on staff in different specializations and at different times of the day. They’ve helped railroads use drones to inspect trains faster and with less staffing. Additionally, they have developed automated drilling platforms for oil & gas companies. They’re a creative and innovative firm that can deliver real value to their clients, providing solutions that they likely wouldn’t be able to develop on their own.

To stay on the cutting edge, Insight acquires smaller firms that offer value to their clients. Insight has grown immensely through acquisitions. A few recent acquisitions include Cardinal Solutions in 2018, Datalink in 2017, Blue Metal architects in 2015. Recently, they announced their intention to buy PCM for $35 a share, or $581 million. PCM generates over $2 billion of sales, so it doesn’t look insane.

The stock suffered over the summer due to its place in the small-cap value universe and a slightly disappointing earnings report which showed some temporary rising costs related to the Cardinal acquisition.

My Take

Insight is a fast-growing company in a hot industry with a strong financial position that trades for very cheap multiples.

Their 10k is replete with buzzwords that usually make roll my eyes: Big data! Software as a Service! Internet of things! Cloud computing! Artificial intelligence!

Insight is at the cutting edge, and the company is a departure from my typically un-cool focus on dull and trashy industries. Don’t worry. I haven’t sold out: selling for 27% of sales and 9x cash flow, this is in the bargain bin of the stock market, despite Insight’s position in a fast-growing hot industry.

Insight Enterprises has a long and profitable history. The company has been consistently profitable over a long period. Insight even recorded positive earnings in 2009, in the depths of the global financial crisis.

Meanwhile, they have been able to grow sales and earnings throughout the economic expansion. EPS increased from 67 cents per share in 2009 to $4.55 in 2018. Sales growth has been similarly strong, growing from $4.1 billion in 2009 to $7.08 billion today.

Insight has a higher degree of financial quality with a Piotroski F-Score of 6, an Altman Z-Score of 3.48 (low bankruptcy risk), and a Beneish M-Score of -2.14 (not a probable earnings manipulator). The debt/equity ratio is current 45%, which is also at a safe level. The share count is down over the last year, so they are not diluting shareholders.

Insight trades at a discount to its competitors and its history. On a price/earnings basis, the current P/E of 11 compares to a 5-year average of 14.4. The average for the industry is 22. On a price/sales basis, the current level of .27x compares to an industry average of 1.45x.

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.