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Ennis Inc: A Decade of Positive Free Cash Flow with 4% Yield and Strong Balance Sheet

January 29, 2013 | About:
Ennis Inc. (EBF) is primarily engaged in the production and sale of business forms, apparel and other business products. EBF is one of the largest private-label printed business product suppliers in the U.S. Headquartered in Midlothian, Texas, it has production and distribution facilities strategically located throughout the U.S., Mexico and Canada, to serve the company's national network of distributors. EBF, together with its subsidiaries, operates in two business segments: print and apparel, with each accounting for about half of its sales. The print segment manufactures and sells business forms, other printed business products, printed and electronic media, presentation products, flex-o-graphic printing, advertising specialties and Post-it Notes, internal bank forms, plastic cards, secure and negotiable documents, envelopes and other custom products. The apparel segment manufactures T-Shirts and distributes T-Shirts and other active-wear apparel through nine distribution centers located throughout North America.

Guru and Insider Insights

Chuck Royce currently holds 2,109,701 shares in EBF, the bulk of his holdings were accumulated in four quarters from the second quarter of 2010 to the first quarter of 2011 at prices ranging from approximately $16 to $18. Kenneth Pritchett, a director of EBF, sold 11,000 shares in January 2013 at approximately $15.5, after accumulating 6,000 shares in the third quarter of 2012 at an average price of approximately $14.

Valuation and Financial Analysis

EBF currently trades at a trailing 12 months P/E of 18.8 and a trailing 12 months EV/EBITDA of 9.3. Its current P/E valuations are at a 24% premium to its five-year average P/E of 15.2. EBF achieved a trailing 12 months ROE of 5.8% and a five-year average ROE of 7.5%.

EBF PE-ROE Comparison1359446264645.png

EBF is profitable in nine of the last ten years and free cash flow positive in every single year in the past decade. EBF has delivered consistent profit margins, with gross and profit margins staying in a narrow range of 24% to 26% and 6% to 8% from fiscal 2003 to fiscal 2012. Management has grown revenue and EPS by a decent 10-year CAGR of 8.1% and 2.8%, respectively.

EBF Earnings-Cash Flow Comparison 1359446421259.png

EBF Profit Margins Analysis1359446590276.png

Financial and Business RisksEBF has a relatively strong balance sheet with a low gross debt-to-equity ratio of 16% and an interest coverage ratio of 22.6.

EBF Cash-Debt-Market Capitalization Comparison1359446762603.png

The increasing sophistication of software, Internet technologies and digital equipment combined with customers’ general preference, will continue to reduce the number of printed documents sold, with corresponding less demand for value-added print content. EBF continues to develop its capability to provide custom and full-color products, in response to the gradual obsolescence of its standardized forms business.

Office supply chain superstores have the economic scale to offer a broad array of office supplies including standardized business forms, checks and related products at competitive prices. EBF has to either reduce prices or offer other incentives in order to enable distributors to attract new customers and retain existing customers.

EBF purchases its paper products from a limited number of sources, which meet stringent quality and ontime delivery standards under long-term contracts. Cotton yarn is the primary raw material used in EBF’s apparel manufacturing processes, with cotton accounts for approximately 47.3% of the manufactured product cost at current pricing levels. EBF acquires its yarn from three major sources, with the largest supplier providing 60% of its yarn requirements during the year. Both cotton and paper are commodities that are subject to periodic increases or decreases in price, and these price changes will have an impact on EBF's profit margins.

Business Quality and Capital Allocation

EBF sees additional opportunities for growth in the print marketplace, as a result of its competitors’ weak financial position and further industry pressures to consolidate. In the current business environment, some of EBF's overleveraged peers are likely to go out of business, be sold or undergo restructuring. EBF is expected to benefit, by either participating in these restructurings/sales, or increase market share at the expense of competitors in the event of a disruption in the marketplace during the process of bankruptcy or the transfer of assets to a new company.

EBF has completed two acquisitions in 2012, after failing to find acquisitions at reasonable valuations for the past four years. The first print acquisition, Printgraphics, enabled EBF to acquire high color print facilities with integrated forms capabilities and expand its presence in this market niche with locations in Ohio and Iowa. The second print acquisition involved the acquisition of certain assets at ten locations from PrintXcel and Printegra Corporation. Four of the locations provided EBF with additional high end color printing under the PrintXcel brand name and expanded its capabilities in the construction of mail documents. Through the Printegra brand, EBF acquired another six locations which provide additional check and print shop capabilities across the country, establishing its status as one of the premier business check producers in the country.

In fiscal 2012, EBF completed the construction of its manufacturing facility in Agua Prieta, Mexico and the transition of its existing manufacturing from Anaheim to Agua Prieta. The new manufacturing facility was built to capture anticipated future growth and savings in production costs over its cost structure in Anaheim, CA. EBF operates its facilities in Mexico pursuant to the “maquiladora” duty-free program established by the Mexican and United States governments, allowing it to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico. The potential growth and efficiencies planned from the new apparel facility in Mexico should give the Apparel Segment the opportunity for significant sales and profit growth in the upcoming years.

EBF has paid dividends in every single year in 1995 and currently sports a dividend yield of 4.5%. Dividends are paid quarterly. Management has grown dividends by a respectable 10-year CAGR of 4.8%.

DisclosureThe author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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