A stock young Buffett would buy

smex3 A stock young Buffett would buy

Buffett invested in small unloved companies in early days. This next stock would qualify as one. Supremex is a Canadian packaging manufacturer. With internet buying being popular, company has been increasing sales of different packaging products. However their stock is quite unloved for a logic reason, they have been know for envelope manufacturing which is still a major business for them. Of course email has killed major part of traditional mail so the reason is logical.

https://www.supremex.com/

smex1 A stock young Buffett would buy

source https://www.supremex.com presentation

 

Main financials

 

Stock has very low P/E ratio of 6.4 and beefy 8% dividend yield.

Market cap is only 90 M, so this is tiny company among listed companies. The long term debt has been increasing during last couple years to 1.5 dollars per share when share price at time of writing is 3.3 dollars. For current ratio this means 2.13 which is high.

 

Story

The large amount of debt has been used to leverage the cardboard packaging assets and purchases. Their most recent purchases are Groupe Deux Printing Inc and Pharmaflex Labels Inc, which operate in pharmaceutical industry. This looks like a smart move when medicine will transform more to be delivered via mail. The company is an old player in the market with history starting from 70’s. The company is listed in Toronto stock exchange. Their change started from 2014 and has worked well for them, needless to say that packaging will take over the business in couple of years with these grow rates.

 

smex2 A stock young Buffett would buy

source https://www.supremex.com presentation

Recent quarterly report summary

The company grew revenue Y over Y by 13.8% and growth came entire from packaging products.(129% sector growth) Envelope business continue to decline in phase of 10%. EBITDA increased also 13.3% Y over Y. This an acceleration from 11% value measured of last six months.

 

Risks and conclusion

 

66% of the business still comes from envelopes and this is the largest risk in addition to debt. Or you could say there is no risk, this business will die. To keep share price positive, they need to be able to do the transformation away from envelopes. Analyst see that in couple years company EPS growth should pickup. Of course media keeps on telling that bear market is near and that would really hurt with high debt load company now has. But in the end the risk is acceptable to me. This is now a value company with under 7 P/E and 8% dividend yield which is transitioning to real growth stock in couple of years. I see so trouble for them to keep up an even continue to increase the dividend by 10% or more in next three years. +20% yearly return possibility with this cigar butt.

 

Disclosure: I own stock in Supremex, Long.

Keep on investing!

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