Description

Nashua Corp, ticker NSH, operates in 3 segments: (i) labels, mainly for supermarket scales and fedex, (ii) specialty paper and (iii) toners for ricoh and other printers. Management recently increased guidance for 2004 and the stock currently trades for 12.6x 2004E book eps of $0.72 and 0.3x 2004E rev of $298mm. However, not reflected in these numbers is that the company’s real estate is worth approximately $21mm (pretax) more than it is listed on the balance sheet (remember, the company's market cap is only $55mm). The company recently had this land in New Hampshire appraised and according to management is actively seeking ways to monetize it. They indicate that its fair market value is about $27mm and it's on their book for only $6mm. (note, I have not independently verified these pretax estimates). Also, given the company’s approximate $15mm deferred tax asset, its actual cash eps this year will be far greater than the reported number.

I also believe the company will eventually be sold because it operates in an industry with excess capacity that is ripe for further consolidation and offers significant potential cost savings, above and beyond the $2mm per year the company estimates it currently spends on public company expenses, which is a huge expense for a company of this size. Management admits there is no “need” for them need to be public as they have no plans to access the capital markets. Furthermore, Gabelli owns 25% of the stock and presumably would support a sale of the company.

I won’t go into too much detail regarding the company’s business as the 10-k does a good job describing it. However, I would note that the company has longstanding relations with many of its customers (fedex, wmt) and has embarked on a successful restructuring to improve its cost structure and sell more value-added and thus higher margin products. In 2004 the company will realize another $4mm of cost savings from actions completed last year.

The bear case is that the company operates in unsexy, low growth businesses which are experiencing margin pressures, and the stock is illiquid. Also, the company is in a dispute with the IRS over a tax payment and may have to pay at most $5mm, although the amount and timing of any payment is unclear.

Regarding the “monetization” of the company’s real estate, the company is relatively tightlipped about what they would do with the aftertax proceeds. However, if one uses the most conservative assumptions and assumes the real estate gain is cash taxed at 35% (probably far too high), after tax proceeds are used to tender at 15% premium to current market price, the company would be trading at less than 9.8x pf 2004E book eps…remember, due to deferred taxes, cash eps would be much higher. Alternatively, one could assume they use the $13.7mm of aftertax proceeds to pay each of the outstanding 6mm shares a $2.30 dividend (stock currently at $9) and shareholders would still have a stock with a decent balance sheet, with logical takeout potential, trading at a below market multiple.

Catalyst

Real estate monetization
Eventual going private transaction