Mod-Pac MPAC
July 16, 2003 - 10:58am EST by
zach721
2003 2004
Price: 7.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 29 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

MOD-PAC (MPAC) $7.50

MOD-PAC was recently spun-off from Astronics March 2003. MOD-PAC has been in business since 1881, as a regional suppiler of paperboard packaging. Since 1970, company expanded to: a) custom packaging b) stock packaging c) short run printing. The company focuses on rapid turn around, low cost leadership, and cutting edge technology to keep its competitive advantage. MPAC believes that the company can print for as little as 1/10 cost as commercial printers due to using different press technology, the way they process/layout orders, limit choices "have it our way" regarding printing paper stock. MPAC process approximately 6,000 orders a day from as back end Internet fulfillment arm for Vistaprint from small businesses and home offices. MPAC has 2 businesses: a) packaging which should grow 4-8% annually and Printing on Demand business (back-end Internet fulfillment) growing 100% a year. I believe MPAC is trading at a value price less than 10x 2003 EPS and 7.5x 2004 EPS for a high growth/high margin business (which is rare in the printing industry).


The company has several very exciting catalysts that I think will allow the stock to double: a) high growth 21% (5x industry avg 4% CAGR since 1996), high margin worst business 8% OM best 19%OM, b) Internet portion of their business is growing at 100% with 18-19% OM and 30% of revs, c) improving economy should help their core packaging businesses significantly, d) insider bought 4% of the company in open market last qtr and (2) 7.4% buy back’s (completed 200K share buyback in 6 weeks april-may 2003) e) valuation 1.3x book and 6.7x 2003 operating income and 4.9x Operating income on 2004 numbers f) margin improvement as Internet business continues to grow OM should push into the low teens. MPAC is in tremendous shape on several fronts: Capacity up to $70mm in revs, spent $12mm in CAPEX in 2002: production capacity up +50%, owns/built a 2.1 megawatt power plant and owns 250,000 square foot plant.

Industry background: there are over 45,000 printing establishments in the US alone generating revenues of $160bn annually with CAGR slightly under 5% since 1996. Most print companies have less than 10 employees. This creates tremendous inefficencies in regards to economies of scale in buying power and labor utilization. Economies of scale can be leveraged from centralized printer with fast turnaround and limiting of layout costs (which cost 30-35% of the cost of layout).


MOD-PAC has been in business since 1881, as a regional suppiler of paperboard packaging. Since 1970, company expanded to:

Packaging 67% of revs should grow 5% annually (8-9%OM)

Custom packaging: 39.6% of revs, Paperboard packaging products for consumer goods companies that fill unique requirements such as protective structure, marketing aesthetics and product differentiation.


Stock packaging: 27.8% of revs a comprehensive line of standard packaging designs for the small candy and gift retailer that is available for same day shipment from in-stock inventories

Printing (POD) 33% of revs growing 100% annually (18-19% OM)

Short run commercial printing: 24% of revs Print-On-Demand products marketed primarily through Internet based outlets, including business cards, post cards, sell sheets, and presentation folders

Personalized Printed Products: 8.6% of revs Print-on-demand products for social occasions, including napkins, party invitations, wedding invitations and party favors, marketed through stationary and gift retailers.
POD is a Cost plus 25% margin

Growth of POD
2000 $700k
2001 $3.2mm
2002 $6.2mm
2003E $12.5mm (2003 estimate from 10K)
2004E $22-24mm (my estimate)

total company
1q01 $6.959mm
2q01 $6.884mm
3q01 $7.794mm
4q01 $9.205mm
2001 actual = $30.842mm .43 in EPS

1q02 $7.563mm
2q02 $7.221mm
3q02 $7,700mm
4q02 $9.637mm
2002 actual = $32.121mm .49 in EPS

1q03 $9.168mm
2q03E $9.00mm
3q03E $9.70mm
4q03E $11.20mm

2003 estimate= $39.30mm .75.-.80 in EPS


growth from: POD = $6mm and $1mm from better economy on custom and stack packaging lines (which is conservative puts equal to 2001 numbers)

2004 estimate = $53mm and $1.00-$1.05

Analysis of business lines:
Customer packaging business: in 10K states custom folding business down $15.1 to $13.7mm from 2001 to 2002 "…decrease is direct result of volume declines that they have experienced for their product line rationalizations, all as a result of the current weak economy… we have confirmed with these customers that another supplier has not displaced us in our relationships… However, volumes in at these customers are expected to recover in 2003."

Custom packaging focused on: pharmaceuticals, healthcare, food, automotive. Early cycle economically sensitive.
Stock packaging market driven by non-durable markets food, beverages, tissues, soaps, and cosmetics. Food and beverages account for over 60% of domestic carton sales.
Major customers: Hershey’s, Tyco Healthcare.

Competitive advantages:
a) Low cost leader
b) Short run for Just In Time manufacturer’s in Northeast, higher margin less competition.
c) Internet marketing for order aggregation (vistaprint, exclusive until April 2011)
d) Installed base of 4000 small confectionary and gift retailers in north american and 20 countries overseas create "…high barriers to entry for competitors, allowing us to realize higher margins on these products than those typically realized in our industry."
Short run commercial print market is highly fragmented mainly small shop printers with less than 10 employess… so they outsource to mpac.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Print on demand business has served over 2,000,000 customers since the launch of Vistaprint (Front end Vistaprint separate private co/Back-end Printing MPAC)
98 percent of customers say meet or exceed their expectations.
98 percent of orders shipped on time.

Link below gives full run down of how vistaprint is trying to change printing industry:
http://www.vistaprint.com/vp/ns/about_us/about_us.aspx?


Management

Shareholder base
Fidelity 10.4%
Oak Forest Investment mgt 7.5%
CEO 5.6%
Chairman 30.60%

Valuation
1.36x tb
5.6x EV/EBITDA (TTM)
ROE 8.85% (which I estimate growing 12%)
Company owns Building (co should probably take on more debt and do sale/leaseback to improve ROE)
.89x revs



LABL
Trades at
6.76x TB
8.3x EV/EBITDA (TTM)
ROE 30%
15x eps
.95x revs

2 main risks:
Class A and Class B stock
Growth of Vistaprint

Management history and relationships

Tony Rider CFO
27 years of audit exp (Partner) at E&Y, joined company in 2000, 51 yrs old

Dan Keane, President/CEO
37 yrs old, with the company since 1995, formerly with Bankers Trust, BA Dartmouth
MBA Duke

Dan’s brother is CEO for Vistaprint (private company)

Dan;s Father Kevin Keane is Chairman of MPAC and (owns 4% stake in visatprint) he has been with Astronics/MPAC since 1972. AB/MBA Harvard.

MPAC NET/NET: I think MPAC is worth $14-16 over the next year, with minimal downside, due to high growth, low p/e, high margins, and aggr. share repurchases.

Catalyst

Catalysts:

a) high growth 21% (5x industry avg 4% CAGR since 1996), high margin worst business 8% OM best 19%OM,
b) Internet portion of their business is growing at 100% with 18-19% OM and 30% of revs,
c) Improving economy should help their core packaging businesses significantly,

d) 9.6x 2003 EPS , valuation 1.3x book and 6.7x 2003 operating income and 4.9x Operating income on 2004 numbers
e) Margin improvement as Internet business continues to grow OM should push into the low teens.
f) MPAC is in tremendous shape on several fronts: Capacity up to $70mm in revs, spent $12mm in CAPEX in 2002: production capacity up +50%, owns/built a 2.1 megawatt power plant and owns 250,000 square foot plant.
g) Insiders bought 4% open market + (1) 7.4% buyback completed and started (2) 7.4% Buyback since March 2003 that’s nearly 20% of the company.
h) Internet business has reached critical mass to drive top and bottom line materially.
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