Manufacturing stock Winpak has acquired a US company. This company is in an industry Winpak knows well. It used part of its large cash holdings to pay—not debt.
On October 1 Winnipeg-based Winpak Ltd. (TSX—WPK) agreed to pay US$42.2 million to acquire all of Control Group of New Jersey. The market approved of the acquisition and sent Winpak’s stock up by 9.2 per cent. We, too, think this transaction is favourable for several reasons.
Winpak manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications.
First, Winpak’s acquisition is in an industry that it knows well. Winpak manufactures and distributes packaging materials and related packaging machines from 12 plants in Canada, the US and Mexico. Its products are used mainly to package consumer goods such as perishable foods, drinks and pharmaceutical products.
Similarly, Control Group delivers specialized printed packaging to the pharmaceutical, healthcare, nutraceutical, cosmetic and personal care markets. It generated sales of nearly US$25 million in its most recent fiscal year.
Winpak wisely sticks to what it knows
Winpak president and chief executive officer Olivier Muggli said, “Winpak Control Group will be able to uniquely capitalize on each other’s complementary technological depths, broad product portfolio.” They have the potential to work together well.
Second, Winpak can easily afford to make this acquisition. On June 1, it held cash of US$395.4 million. Even after paying for the transaction the company still has cash of US$353.2 million. At a time when many companies simply buy back their own shares, Winpak is using its cash to build its business. In fact, in the first half of 2019, the company invested a net US$29.9 million into property plant and equipment.
Third, Winpak will likely avoid tariffs even if US President Donald Trump changes his mind again. We expect Mr. Trump to back away from more intense trade wars. But Winpak should avoid higher tariffs even if Congress fails to pass Mr. Trump’s NAFTA (North American Free Trade Agreement). After all, Winpak now has even more American plants with which to supply its American customers.
Fourth, Winpak Control Group will benefit from stable repeat business. And since its customers manufacture highly-consumable products, Winpak Control Group should see new orders flow in regularly.
Winpak remains a buy, mostly for long-term share price gains. While Winpak does pay a dozen cents a share, its dividend yields less than 0.3 per cent. The company has also failed to raise its dividend for years. With so much cash, we would like to see Winpak reward its shareholders more generously. Even so, Winpak remains a buy.
This is an edited version of an article that was originally published for subscribers in the October 18, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •11/6/19 •