This manufacturing stock is a buy, mostly for gains

We hold a high opinion of Winpak Ltd. It’s earning record profits, year after year. The company is using its excellent balance sheet and solid cash flow to build the business. Winpak is a manufacturing stock to buy, mostly for long-term share price gains.

We regularly review Winnipeg-based Winpak Ltd. (TSX─WPK). Since we published our November 27, 2015 issue, its shares have climbed by 10.3 per cent. The company earned record profits in 2014 and 2015. It’s expected to earn record profits both this year and next. This manufacturing stock remains a buy, mostly for long-term share price gains.

Despite its growing earnings, Winpak has paid just a small and flat regular yearly dividend of 12 cents a share for years. That yields only a little more than 0.2 per cent. The company, however needs lots of cash to invest. While the dividend is small, it’s still a plus.

Winpak “manufactures and distributes high-quality packaging materials and related packaging machines. The Company’s products are used primarily for the packaging of perishable foods, beverages and in healthcare applications.” It profits from repeat business. As consumers buy food, drinks and drugs, producers need to package and replace them.

In 2015, Winpak earned a record $99.2 million, or $1.53 a share (all numbers are in U.S. dollars unless preceded by a C). This was up by more than 26 per cent from record earnings of $78.4 million, or $1.21 a share, the year before. Revenue rose by 1.3 per cent, to $797 million. All operating and financing costs as a group fell by 3.2 per cent, to $650 million.

Lower raw material costs mattered most

Lower raw material costs added 24 cents a share to Winpak’s earnings. Internally-generated volume growth further raised earnings by another 5.5 cents a share. Foreign exchange movements boosted earnings by 6.5 cents a share. And lower income taxes added 0.5 cents a share. These were partly offset by higher operating costs, which reduce the profit by 2.5 cents a share. Also, more going to non-controlling interests erased two cents a share. The net effect was to raise earnings by 32 cents a share.

Winpak has an excellent balance sheet. For one thing, it holds cash of $165 million. For another, the company remains debt free. Keep in mind, too, that Winpak’s cash flow exceeds its needs. In 2015, it generated cash flow of $146.6 million. This exceeded total investment of $54 million and dividend payment of $80.8 million. The excess cash flow of $11.8 million should keep the balance sheet healthy.

Winpak is planning to expand its manufacturing operations. It writes, “Of particular importance will be the commercialization of the massive technologically-advanced cast co-extrusion line which is in the process of being installed at the Company’s modified atmosphere packaging facility in Winnipeg.” The company is also expanding its rigid container operations in Chicago and its shrink bag operations in Georgia. The company plans to invest more this year. It will also consider making acquisitions.

Winpak writes, “As 2016 begins, the Company is optimistic with regard to the upcoming year. Opportunities in the sales pipeline are significant and should provide the impetus for expanding volumes in 2016 and beyond.”

Winpak’s valuation should improve

In 2016, Winpak is expected to earn a record C$2.78 a share. That represents earnings per share growth of only 4.9 per cent. Based on this estimate, the shares trade at an acceptable price-to-earnings, or P/E ratio, of 17.5 times. Next year, the company’s earnings growth is expected to speed up to 14.7 per cent, to C$3.19 a share. Based on this estimate, the shares trade at a better P/E ratio of 15.3 times.

Two analysts who follow Winpak see it as a ‘Strong Buy’. Our own view is that it’s a buy, mostly for long-term share price gains. We don’t use adjectives such as ‘strong’ buy or ‘weak’ buy. But we have seen this company’s share price climb steadily over the decades.


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

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