Today Top Stock Insights Editor Tyler Laundon recommends a new, little-known manufacturing company with some good catalysts for growth.
“Today we’re going to jump on board with a small manufacturing company that has an attractive mix of exposure to both stable and rapid growth markets.
“The company is Tredegar (TG, NYSE). It has a market cap of $830 million, pays a dividend yielding 1.1% at today’s price of $25.65 and has been growing revenues at an average rate of 11% over the past three years. In 2012 revenue growth accelerated to 14.3% as recent acquisitions added a nice lift.
“Tredegar isn’t a well-known company, [but] lesser-known stories such as this often have superior upside potential, so Tredegar’s under-the-radar status should work well for us.
“The business is comprised of two segments at the moment, although management has indicated it is currently shopping for a ‘third leg of the stool.’ What this will be is unknown at this point, although naturally we should expect any acquisition will fit well with current operations, which include a film product division and an aluminum division. The revenue split in 2012 was 71% film products ($612 million) and 29% aluminum products ($245.5 million).
“Films is a generic term, there are actually five businesses within this category. ... Personal care products — by far the biggest category — include various materials for personal care products for people of all ages. If you, like me, have wondered who came up with those fancy sticky tabs on baby diapers, well, it was a company like Tredegar. The films segment also includes flexible packaging for foods, and surface protection films to protect items like television and tablet screens during the manufacturing process.
“Each of these product categories appears to enjoy growing demand. Personal care products are regularly purchased by consumers in developed markets, and developing markets like China and India are increasing purchases at the value (inexpensive) end of the market where Tredegar is a major player.
“As I mentioned earlier, this is the bigger segment, accounting for 71% of revenues in 2012. It’s also the most stable, as 31% of sales come from Proctor & Gamble (PG) for inclusion in their consumer goods products. Films is also growing rapidly, expanding sales at 14% in 2012.
“I’m intrigued by Tredegar’s aluminum division for two reasons, first because it has high exposure to construction, with 67% of sales coming from the nonresidential sector and an additional 10% coming from residential. This is a great little play on the housing and construction rebound and recent numbers indicate that that market continues to improve.
“Tredegar also states that aluminum demand from auto manufacturers is picking up as these companies look to reduce the weight of vehicles in order to improve fuel efficiency. At just 5% of the aluminum division’s sales in 2012 this isn’t a huge contributor yet, but it certainly represents nice upside as the auto industry continues to grow.
“Another attractive feature of Tredegar is its geographic sales mix; the U.S. is certainly the largest market but the recent acquisition of Terephane in Brazil has bumped up the company’s exposure to growth markets overseas as well. The acquisition of Terephane also represents a major growth catalyst for Tredegar as the company is working on a plant expansion project there, which will essentially double capacity and should lead to significant revenue growth for the films division.
“There are a lot of little moving parts with Tredegar when you delve into the details of each business, but taken together it’s clear that management has assembled a nice portfolio of cash-generating and profitable businesses. It has enjoyed positive operating cash flow each year over the last decade, including $83 million in 2012.
“That’s created a stable company, which has in turned allowed management to increase returns to shareholders in the form of stock buybacks and dividend growth. In 2010, Tredegar was paying just $0.04 per quarter; that payment increased to $0.045 in 2011 and in the second half of 2012 to $0.06, with a nice $0.75 special dividend added on top. Right now the company is paying $0.07 per quarter and I expect this will continue to increase over the coming quarters.
“Shares of Tredegar pulled back to $25.65 after a nice and steady run to $30.00. Let’s use this opportunity to add the stock to our portfolio and look for a rally to $30.00 and above, and a return of 20% to 50% over the coming 12 months. Action to take: Buy Tredegar (NYSE:TG) around $25.65 a share.”
Tyler Laundon and Ian Wyatt, Top Stock Insights, www.topstockinsights.com, 866-447-8625, 6/28/13