Schweitzer-Mauduit: High-Quality Mid-Cap at a Discount

Schweitzer-Mauduit is a little known, high-quality predictable company selling at a good margin of safety

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Praveen Chawla
Oct 01, 2020
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Schweitzer-Mauduit International, Inc. (

SWM, Financial) is a $900 million market cap performance materials company with a legacy business in the cigarette wrapper (paper) industry and a newer business in the resin-based nets and films market.

History

Schweitzer's history dates back to the Renaissance, when Schweitzer-Mauduit International's first paper mill (Papeteries de Malaucene) began operations in the south of France. Modern-day Schweitzer was founded in 1908 in New Jersey, and in 1922, Papeteries de Malaucene was acquired. Operations were focused on fine writing papers and fine papers for the tobacco market, as well as the addition of Schweitzer's reconstitution capabilities.

Schweitzer was acquired by Kimberly-Clark (

KMB, Financial) in 1957. On Nov. 2, 1995, Schweitzer became an independent public company after a spin-off from Kimberly-Clark.

Schweitzer expanded its paper operations around the world with key acquisitions and openings in North and South America, as well as in Europe, including Schweitzer's European flagship operation in Poland. During this time, Schweitzer formed two joint ventures in China: China Tobacco Mauduit (paper) and China Tobacco Schweitzer (recon). Expanding its reach beyond paper with organic growth strategies and acquisitions, Schweitzer established its Advanced Materials & Structures (AMS) platform.

Schweitzer acquired and integrated Argotec (2015), Conwed Plastics (2017) and DelStar Technologies (2013), specializing in market-leading netting and specialty TPU films. The company also created its in-house LeafLAB, focused on botanical materials for beverage, packaging and cosmetic applications.

More recently, in February of 2020, the company acquired Tekra, a business producing technical film for end-markets that include medical, graphics, electronics and automotive and creating access for new customers as well as opening opportunities to provide additional solutions to existing customers.

Segments

Schweitzer makes papers, films, nets and nonwovens that are used in a diverse range of products, applications and industries. These engineered materials are made from fibers, resins and polymers, which provide solutions to make products stronger, more durable and with increased performance.

The company operates in two segments:

  • Advanced Materials & Structures (AMS), which serves diversified markets and is the growth platform. The segment makes material such as netting, films, filtration material, transportation & architecture, blankets & wraps, tubings etc.
  • Engineered Papers (EP), which supplies the tobacco industry and is the cash cow. The EP segment is in long term secular decline as cigarette volumes continue to decline. Schweitzer enjoys a oligopolistic position in the market with leading market share for its fire retardant cigarette paper.

The AMS segment, which is acquisition-driven, has generated strong growth in recent years.

The EP segment provides a stable source of cash to the company and shareholders.

Cash Flow

The company generates strong cash flow from its business and the 6% dividend is well covered with a 13% free cash flow yield. While Covid-19 has impacted AMS (particularly transportation film business), other businesses are steady. Overall, quarterly revenue has declined by about 6% from last year.

Balance sheet

Following is a snapshot of the balance sheet. Long term debt of $666 Million is balanced against equity of $607 million. The debt ratios which are given below are what I consider comfortable.

Debt-to-Equity
1.1
Debt-to-EBITDA
3.49
Interest Coverage
4.71

Long term debt breakdown is as follows:

June 30, 2020

$500 million -Revolving credit facility - U.S. dollar borrowings (matures Sept 2023)

127.00

$200 million - Term loan facility (matures Sept 2025)

196.50

6.875% senior unsecured notes due October 1, 2026, net of discount of $6.5 million and $6.9 million at June 30, 2020 and December 31, 2019, respectively

343.50

French employee profit sharing

3.90

Finance lease and capital lease obligations, respectively

3.30

Debt issuance costs

(5.20)

Total debt

669.00

Less: Current debt

(2.60)

Long-term debt

666.40

As the following waterfall chart shows, the company was in the process of deleveraging. However, the acquisition in the first quarter, as well as the current pandemic crisis, caused the company to draw from its credit lines to bolster its cash cushion. It has since resumed the deleveraging process and has reduced debt by $86.7 million in the latest quarter.

Growth

Long term revenue and Ebitda growth is in the low single digits (3 to 4%), which appears to be in line with a price-earnings ratio of 10. Book value and retained earnings have grown at about 5 to 6% as the company shifts from its declining legacy business to its growth platform.

d8d6edb58776310fd6710174b04dfc75.png

Valuation

Schweitzer is showing considerable undervaluation with regards to 10-year median price-earnings, price-sales and price-book ratios. The valuation lines indicate the stock would be expected to trade in the $40's but it is currently trading near $30.

2014b2a5a3a2591286e135d246df09c0.png

I get a valuation of ~$36 with the help of Gurufocus's two-stage discounted cash flow calculator when I use a discount rate of 8%. I assumed a 10-year Earnings Per Share growth of 3%, followed by a growth rate of 2% for the following 10 years.

My one-to-two-year target price is $40. This gives me about a 30% margin of safety.

Insider Buying

There has been some insider buying of the stock, which is a confirmation of value:

No.

Amount

May 29, 2020

Kimberly E. Ritrievi

Independent Director

Buy at $30.00 per share.

1,000

30,000

May 13, 2020

Jeffrey Kramer

Director and Chief Executive Officer

Buy at $26.68 per share.

4,000

106,708

Dividend

Schweitzer is currently paying a 6.12% (trailing) dividend yield. With a payout of 60% of earnings it is well covered and has grown in the last five years at the rate of 3.9%. Below is the dividend history of Schweitzer. As the chart shows, Schweitzer has become a high dividend payer only in the last seven years.

690cc64797ed8bbd1605218fc07daab9.png

Conclusion

Schweitzer looks like a modest growth value stock which is selling with a good margin of safety. Its legacy non-cyclical but declining tobacco paper business is pumping out strong cash flow to fund the diversified advanced material business the company is building through acquisitions.

However, the AMS business is cyclical. In my opinion, once the economy recovers from the current recession, I am anticipating that the stock price will recover to the low forties, giving us a strong return. Meanwhile, we can enjoy a healthy 6% dividend yield.

Disclosure: The author is long Schweitzer-Mauduit International, Inc. shares.

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I am a full-time investor now, investing my own money. I spent most of my working life in the pharmaceutical industry.