The stock market in the modern-day is truly a remarkable thing.
From the comfort of your dining room you are able purchase ownership in almost every industry imaginable. Companies which entrepeneurs spent years toiling away to build you are able to purchase with the click of a mouse in a matter of minutes on your favorite brokerage site. A true democratization of capitalism.
Today I bring you the write up of my largest position, and what is currently the single best risk-adjusted common share opportunity listed on the TSX bar none, Cascades Inc. (CAS:TSX). While I was fortunate to purchase my position back when the shares were sub $10, the lion share of the gains are still to come as a huge catalyst lies on the horizon. The shares currently trade hands at $11.68.
Who are they?
Cascades produces 100’s of paper products individuals and businesses use every day.
Their operations span North America and Europe with 90 operations in 6 countries and across 2 continents. Broadly speaking, their EBITDA can be broken down into four major segments:
Cascades current earnings trades dirt cheap. Using the 12 month trailing adjusted earnings of 1.28 and Cascades current share price of 11.68, Cascades currently trades at a Price-to-Adjusted Earnings of 9.125. This is a material 59% discount to an average of its packaging peers in the US despite having growth in line with the industry.
Here is a comparison of Cascades against their major peers in the space: Graphic Packaging Holding Company GPK, International Paper Company IP, Sonoco Products Company SON, West Rock Company WRK, and Packaging Corporation of America PKG.
|Packaging Peers||Price/Adjusted Earnings|
|Graphic Packaging Holding Company||16.13|
|International Paper Co||15.34|
|Sonoco Products Company||19.7|
|West Rock Company||20.63|
|Packaging Corperation of America||16.8|
|Peer Group Average||17.72|
If Cascades were to trade inline with its group average that would imply 94% upside, if that sounds incredible…just wait.
The stock looks even cheaper on a multiple basis if you net out their relatively liquid 20% interest in Boralex (BLX:TSX), a renewable power company. Their Boralex position is non-core to their business and in theory they could distribute this stake of shares to their current shareholders. Their 20% stake based on Boralex’s current valuation equates to 280million or $3.08 worth of value per CAS share. When we net the Boralex investment out of the share price, Cascades’s current Price-to-Adjusted Earnings ratio drops to a staggering 6.7x. But wait….there is more.
Near Term Catalyst: Containerboard Price Hike
Here is where things get exciting, recently players in the containerboard industry representing 80% of capacity agreed to a 8% price hike of $50 per tonne.This hike has been mostly implemented already. Cascades derives 47% of their EBITA from containerboard, if we assume a base case of all else constant this would mean an extra 57million straight to their bottom line, or an additional 60c earnings per share.
Bringing their 2017 Adjusted Earnings Per Share to $1.88. If we net out Boralex again that brings their Price-to-adjusted earnings ratio to 4.57.
Cascades reports earnings on March the 2nd for the period of October-December, the price hike was implemented in October so this upcoming earnings season is where we will begin to see the magic. The full effects won’t be felt until the subsequent quarter mind you as some contracts need to roll off the books and be renewed
Why is this so cheap?
Two Big Reasons:
- It’s tough to screen for the stock due to the differential between adjusted earnings and GAAP earnings
- The company has a smaller marketcap and many larger funds can’t touch it
If we are extremely conservative and assign a 15x earnings multiple to Cascades we come up with a price of 28.2, adding in the 3.08 for the Boralex investment, the fair value for this stock is 31.28 which implies a 167% return.