While things do not curretly look good for Orchids Paper Products Co. (TIS, Financial), I believe the market has overreacted and things look a lot worse than they actually are. Faced with a streak of bad news, market participants (mostly retail investors attracted by the high dividend) have tended to shoot first and ask questions later.
Orchids' stock has fallen by over 66% in the last 12 months due to a combination of factors:
- Decrease in sales (due to inventory reduction by a major customer, which is deemed a temporary setback by management).
- Elimination of dividend to preserve capital and reduce leverage.
- Delay in the startup of a new plant (which has just now come on stream).
- Perceived problems with respect to debt covenants (which have now been resolved).
The company produces bulk tissue paper, known as parent rolls, and converts parent rolls into finished products, including paper towels, bathroom tissue and paper napkins. The company sells its products for use in the "at home" market under private labels to a customer base consisting primarily of dollar stores, discount retailers and grocery stores that offer limited alternatives across a wide range of products.
The company recently suspended its dividend and sales have been softer than anticipated. This, together with the delay in bringing its Barnwell facility on line, has sent the stock careening to multiyear lows. Short interest in the stock was at 21.3% at the end of April.
Figure 1 - Source: GuruFocus.com
The reasons are not hard to determine. Common stock investors are fearful of getting wiped out as the company continues to build up debt for its expansion in the Southeast, while revenues and earnings fall short of targets.
Figure 2 - Source: Barron's
The Barnwell facility is costing the company about $150 million - funded with about 20% equity and 80% debt. To a company with a market cap of $126 million - that is a lot and looks scary. The enterprise value is $273 million. Without question, the company is highly leveraged and could run into a liquidity crisis if market conditions deteriorate. To understand the debt situation, let us look under the hood. According to the charts below, as Orchid has bulked up the balance sheet, it has run into market turbulence.
Figure 3 - Source: Author with data from GuruFocus.com
| Â | Orchid | Industry |
| Debt-Equity Ratio | 1.12 | 0.48 |
| Current Ratio | 1.23 | 0.81 |
| Quick Ratio | 0.74 | 0.55 |
| Interest Coverage | 5.02 | 23.83 |
| Leverage Ratio | 2.71 | 2.68 |
Figure 4 - Financial Ratios
From looking at the company's long-term debt obligations, we learn that as of March 31 the company's weighted average interest rate was 3.51%, which is not bad at all.
Long-term debt as of March 31 and Dec. 31, 2016 consist of:
| Â | Â | March 31 | Â | Dec. 31, 2016 | Â | ||
| Â | Â | Â | Â | Â | Â | ||
| Â | Â | (In thousands) | Â | (In thousands) | Â | ||
| Revolving line of credit, maturing June 25, 2020 | Â | Â | $13,846 | Â | Â | $16,447 | Trending down |
| Delayed draw term loan, maturing June 25, 2020 | Â | Â | $87,730 | Â | Â | $72,342 | Â |
| Term loan, maturing June 25, 2020, due in quarterly installments of $675,000 for the first year and $1,000,000 thereafter, excluding interest paid separately | Â | Â | $41,600 | Â | Â | $42,600 | Â |
| Term loan, maturing Dec. 29, 2022, due in quarterly installments of $255,006, including interest | Â | Â | $10,438 | Â | Â | $10,577 | Â |
| Capital lease obligations | Â | Â | 34 | Â | Â | - | Â |
| Less: unamortized debt issuance costs | Â | Â | (1,383) | Â | Â | (1,249) | Â |
| Â | Â | Â | 152,265 | Â | Â | 140,717 | Â |
| Less current portion | Â | Â | 8,511 | Â | Â | 6,728 | Â |
| Â | Â | Â | $143,754 | Â | Â | $133,989 | Â |
Figure 5 - Source: Orchids Paper Products CO /DE (Filer) CIK: 0001324189
Most of the long-term loans mature in 2020, so the company has two years to get its business in order before renegotiating the loans. The Barnwell plant is expected to be fully operational by the end of the year and will be generating positive free cash flow in 2018. Unless the economy is hit with another major recession, the company should be able to handle the debt maturities. The company has wisely cut its dividend, saving about $14 million a year to go toward debt reduction.
Key insiders have recently bought equity in the open market with both the CEO and chief financial officer participating. Two of the three analyst covering the stock seem to be optimistic and indicate a 100% upside on the stock.
Figure 6 - Source: Barron's
Has the company really gone from hero to zero in less than a year? I think not. Obviously the delay and then elimination of the dividend drove a lot of the hoi polloi investors away and serious growth investors are not really attracted to small-cap, private-label toilet paper and such. We will have to wait until the grizzled value investors hunting for bargains show up. It should be soon. Meanwhile, I plan to go long and do not expect to be wiped out.
Disclosure: I do not currently own the stock, but plan to initiate a position in the near future.
