“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
WestRock Co.— a leading cardboard-packaging maker—recently spun off its specialty chemical operations as Ingevity Corp.
The spinoff created two “pure play” companies that can now focus on expanding their main businesses.
For example, WestRock recently announced a deal to buy rival paper maker KapStone. That will help it profit from rising demand for cardboard boxes as more consumers shop online. Ingevity also recently acquired an Arkansas-based chemicals firm that should spur its growth.
WESTROCK CO. $65(New York symbol WRK; Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $16.6 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; TSINetwork Rating: Extra risk; www.westrock.com) is a leading provider of packaging materials and systems. It operates through 302 locations across North America, South America, Europe and Asia.
WestRock was formed by the July 1, 2015, merger of Rock-Tenn Company and Mead-Westvaco Corporation.
Since then, the combined firm has focused on expanding its core paper and packaging businesses by acquiring new operations and divesting itself of others. That includes the May 2016 spinoff of its specialty chemicals business, Ingevity (see page 26).
For the fiscal year ended September 30, 2017, WestRock’s revenue rose 4.9%, from $14.2 billion in 2016 to $14.9 billion. Earnings rose 2.7%, to $670.6 million, or $2.62 a share, from $653.0 million, or $2.53.
WestRock’s revenue for its fiscal 2018 first quarter, ended December 31, 2017, was $3.89 billion. That’s up 13.0% from $3.45 billion a year earlier. The increase came from higher selling prices and increased sales of high-profit-margin packaging. Overall earnings jumped 87.8%, to $226.0 million, or $0.87 a share, from $120.3 million, or $0.47, a year earlier.
In January 2018, WestRock acquired Plymouth Packaging. That maker of corrugated packaging gets roughly 70% of its sales from its “Box on Demand” systems, which allow shippers to tailor boxes to their specific requirements. The remaining 30% of Plymouth’s sales come from traditional corrugated packaging. WestRock has yet to disclose the purchase price.
The company will also pay $3.5 billion for KapStone Paper and Packaging Corp., which makes specialty containerboard, corrugated boxes and specialty papers. The purchase will let it expand further into packaging for online retailers.
WestRock holds cash of $312.3 million, or $1.23 a share. Its long-term debt of $5.4 billion is a reasonable 33% of its market cap. The company raised its quarterly dividend by 7.5% with the November 2017 payment, to $0.43 a share from $0.40. The new annual rate of $1.72 per share yields 2.6%.
While growth by acquisition increases WestRock’s risk, the company is now well-positioned to compete in the packaging industry’s fastest-growing areas. The stock currently trades at 16.8 times the company’s forecast 2018 earnings of $3.88 a share.
WestRock is the second-largest packing companies in the U.S. after International Paper.
Acquisition of rival KapStone will boost annual revenue to $20 billion
KapStone should immediately add to WestRock’s earnings and cash flow
WestRock is a buy.
INGEVITY CORP. $78(New York symbol NGVT; Manufacturing & Industry sector; Shares outstanding: 42.2 million; Market cap: $3.3 billion; No dividends paid; Takeover Target Rating: Highest; TSINetwork Rating: Extra risk; www.ingevity.com) is a specialty chemicals company that provides products for paving, oil exploration, adhesives, agrochemicals and many other industrial uses.
Ingevity has two operating segments: Performance Materials accounts for 36% of its revenue; and Performance Chemicals make up the remaining 64%.
The Performance Materials segment produces carbon products, including powder and extruded pellets for purifying food and water. Those products also control vapour emissions for cars and trucks.
The Performance Chemicals business makes products for makers of paper, adhesives, and asphalt.
In the fourth quarter ended December 31, 2017, Ingevity’s revenue increased 8.8%, to $229.5 million from $210.9 million a year earlier. Most of the revenue increase came from a 17.7% jump in sales for the company’s Performance Materials segment.
Excluding one-time costs, earnings in the quarter increased 32.4%, to $0.45 per share from $0.34. In addition to the higher revenue, lower raw material costs and better productivity expanded its profit margins.
In March 2018, the company paid $310 million for Georgia-Pacific’s pine chemicals business. From a plant in Arkansas, the firm makes pine-based substances for a wide variety of products such as adhesives, paints and inks. Ingevity expects the elimination of overlapping operations will reduce its annual costs by $11 million.
On December 31, 2017, the company’s long-term debt was $444.0 million. In January 2018, it sold $300 million in senior notes to help pay for Georgia-Pacific. Today, the total debt of $744.0 million is a manageable 23% of Ingevity’s market cap. The company also held cash of $88 million.
Ingevity should earn $3.49 a share in 2018. It trades at a slightly high 22.3 times this year’s forecast earnings.
Ingevity rates Highest in our Takeover Target Rating. The stock is a buy.
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