Container and packaging stock Winpak is a buy

We’ve added manufacturing stock Winpak Ltd. to our list of Key stocks. We expect this packaging and container stock to deliver further long-term share price gains. We also want it to continue to pay special dividends or to raise its regular dividends. It remains a buy, mostly for share price gains.

We’ve added Winnipeg-based packaging and container stock Winpak Ltd. (TSX—WPK) to our Key stocks. It remains a buy for further long-term share price gains. While the company pays a small regular dividend, it has supplemented this with sizable special dividends in each of the past two years.

Winpak manufactures and distributes packaging materials and containers as well as packaging machines. Its packaging is used mainly to protect perishable food, drinks and health care products, such as pharmaceutical drugs.

In the first half of 2016, Winpak’s shareholders earned $51.7 million, or 80 cents a share (all numbers in U.S. dollars unless preceded by a C). This was up by 5.3 per cent from earnings of $49.3 million, or 76 cents a share, a year earlier. It raised its revenue. Meanwhile, it slightly reduced its costs. The lower loonie added 2.5 cents to its earnings per share.

Stable repeat businesses usually earn more

One positive aspect of Winpak’s business is that it generates repeat business. This beats trying to catch the latest wave in, say, fashion or toys, which change quickly. A second positive aspect is that Winpak packages consumer staples. Sales of food, drinks and medicine hold up relatively well, even if the economy weakens. This stable business enables the company to produce steady earnings and cash flow.

In the first half, Winpak sales inched up by 1.2 per cent, to $402.3 million. Its volume growth was up by 6.3 per cent. Volumes of foil lidding and rollstock, biaxially oriented nylon plus specialty films jumped between 10 and 15 per cent. New products, “which propelled shipments forward”, included retort die-cut lidding, multi-pak yogurt lidding and chub film. Volumes of rigid container and modified atmosphere packaging grew by mid-single digits. Shipment gains in condiment and retort containers as well as meat industry trays more than offset lower shipments of specialty beverage containers. One weak spot was lower shipments of packaging machinery. Another weak spot was lower selling prices. This was due to lower raw material costs, especially polyethylene resin, and the lower Canadian dollar.

In the first half, Winpak cut its cost of sales by 1.1 per cent. It achieved this despite unfavourable manufacturing results due to “capacity constraints and the inherent learning involved with the introduction of new product offerings”. Less revenue also limited the improvement of the gross profit margin.

In the first half, Winpak’s costs as a group declined by 0.2 per cent. That’s despite a pleasing 11.2 per cent rise in its research and technical costs. These should enable the company to continue to introduce new up-to-date products. With revenue up and costs down, its pre-tax earnings rose by seven per cent, to $79.1 million. This was only partly offset by a 54 basis point rise in Winpak’s income tax rate, to 32.4 per cent. (A basis point is one hundredth of one per cent.)

Winpak’s higher first-half earnings are confirmed by its higher first-half cash flow. It generated operating cash flow of $96.2 million. This was up by 9.3 per cent from operating cash flow of $87.4 million, a year earlier. Even better, this cash flow easily exceeded dividend payments of $2.9 million and capital investment of $28.3 million. The capital investment, in turn, more than offset first-half depreciation and amortization of $17.2 million. Expanding capital investment is a hallmark of a growing company.

It’s debt free and holds $176.3 million

Excess cash flow should keep Winpak’s balance sheet healthy, even if it does acquisitions. It remains debt free. Even better, the company holds cash of $176.3 million. This gives it financial flexibility.

Winpak has delivered solid share price gains over many years. But it has paid regular yearly dividends of only a dozen Canadian cents a share for many years. Based on the company’s share price, the regular dividend yields only 0.27 per cent.

Fortunately, Winpak supplemented this in each of the past two years. In 2014, it paid a special one-time dividend of a loonie a share. Based on today’s share price, the total dividend of C$1.12 a share yielded a decent 2.6 per cent. In 2015, the company paid a special dividend of C$1.50 a share. The total dividend of C$1.62 a share worked out to an attractive yield of 3.7 per cent, based on today’s share price.

Given Winpak’s large holdings of cash, we hope that it continues to declare special dividends. Or that it increases the size of its regular dividends. With management owning 52.5 per cent of the shares, its interests are similar to those of other shareholders.

Management plans for long-term growth

Chairman Antti Aarnio-Wihuri of Finland controls the company. One plus about this is that management can plan for Winpak’s long-term growth. It need not slavishly meet the market’s latest expectations for its quarterly results.

Winpak has a favourable outlook. It writes that “the Company remains optimistic with regard to volume growth and earnings performance for the balance of 2016”. It’s working on sales opportunities to add to its earnings growth. The company expects its manufacturing results to improve as its capacity grows and it gains experience with new products.

Winpak is investing in a “massive” cast co-extrusion line at its modified atmosphere packaging plant in Winnipeg. It writes that this line “is at the cutting edge of technology”. The company expects to commercialize the line by the end of 2016. It expects “substantial” benefits from the line.

In 2016, Winpak expects to invest $80 to $90 million in two American plants. This is to expand rigid container production in Illinois and shrink-bag production in Georgia. One negative development from the company’s perspective is a partial recovery in oil price, which raises its raw material costs somewhat.

Winpak “will continue to pursue acquisition opportunities”. One plus is that it plans to stick to its industry, which it knows thoroughly. The company also writes that it’s “committed to substantial organic growth through capital investment”. It expects the lower loonie to add to its earnings again.

We expect Winpak to earn $2.13, or C$2.81 a share, in 2016. That would represent earnings growth of 4.4 per cent from $2.04 a share last year. Based on this estimate, the shares trade at reasonable price-to-earnings, or P/E, ratio of 15.6 times. In 2017. we expect the company’s earnings to rise by 15 per cent, to $2.45, or C$3.24 a share. Based on this estimate, the shares trade at a better 13.5 times. The shares also have upwards momentum and could rise further.

Winpak remains a buy, mostly for long-term share price gains—unless it continues to supplement its small dividends with special dividends.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846