KapStone Excels with Regional Focus - Analyst Blog

With a dedicated regional focus, shares of paper and paper products manufacturer KapStone Paper and Packaging Corporation KS have steadily been on the uptrend from June 2013. The shares are currently trading at $30.56 as on March 18, 2014, which translates to a phenomenal year-over-year return of 121.5%.

KapStone primarily manufactures containerboard, corrugated products and specialty paper products. It is the largest producer of kraft paper in the U.S., which is utilized for making bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags. Despite a pan-American presence, the company largely focuses on the regional markets, operating 4 paper mills and 22 converting plants in the U.S.

KapStone registered record fourth quarter and full year 2013 results primarily driven by the accretive acquisition of Longview Fibre Paper and Packaging, Inc. Consolidated quarterly net sales increased 87% year over year to $563 million as Longview contributed $241 million of incremental revenues. The company also sold 703,000 tons of paper during the quarter compared with 408,000 tons in the year-earlier period.

Operating income for fourth quarter 2013 improved an astronomical 289% on a year-over-year basis to $74 million on the back of the Longview acquisition and higher containerboard and corrugated product prices, partially offset by higher fiber costs and a less favorable product mix.

Consolidated net sales for full year 2013 increased 44% year over year to $1,748 million. Operating income for the year doubled to $220 million again due to the Longview acquisition and higher selling prices, partially offset by higher fiber and maintenance outage costs.

Cash flow from operating activities improved to $130 million during the reported quarter from $40 million in the prior-year quarter. This enabled KapStone to repay $89 million of debt, including a voluntary prepayment of $40 million. As a result, the company improved upon the debt leverage ratio to 2.7x from 3.8x. Consequently, the company will be able to reduce its interest margin spread on its bank loans by 25 bps from early March 2014.

This Zacks Rank #3 (Hold) stock is currently trading at a forward P/E of 12.7x and is likely to continue the growth momentum in the near future with long-term earnings growth expectation of 5.0%.

Other stocks in the industry that warrant a look include Neenah Paper, Inc. NP, Clearwater Paper Corporation CLW and Fibria Celulose SA FBR, each carrying a Zacks Rank #2 (Buy).