CLEARWATER PAPER CORP CLW
July 23, 2009 - 2:04pm EST by
chris815
2009 2010
Price: 34.80 EPS $10.00 $4.00
Shares Out. (in M): 12 P/E 4.0x 9.0x
Market Cap (in $M): 421 P/FCF 4.0x 7.0x
Net Debt (in $M): 150 EBIT 200 100
TEV ($): 525 TEV/EBIT 2.5x 5.0x

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Description

Clearwater Paper Corp. (CLW) is a good business (EBITDA / assets > 11% for the last five years) at a reasonable price (less than 5.6x trailing twelve month EBITDA, 10.4x 2008 free cash flow, 1.6x tangible book value).  On these metrics, CLW is trading at 30% to 50% discount to its competitors. There are, however, two issues which make CLW an extraordinary value:

 

  1. CLW is earning $455,000 per day tax-free courtesy of the alternative fuels clause contained in 2005 federal highway legislation and modified in a 2007 energy bill. CLW has participated in this program since late January 2009 and, year-to-date, has earned $74 million from it. These earnings are not included in the above EBITDA and free cash flow valuation calculations, but are included in the enterprise value calculation.  The tax credit earnings have cut CLW’s debt in half year-to-date and, if they continue through year-end, the company’s debt will be eliminated.

 

  1. Unlike other paper companies, CLW’s business is thriving and its 2009 earnings, excluding the effects of the aforementioned tax credit, are likely to be significantly higher than its 2008 earnings.

 

Background

Founded in 1927, CLW makes tissue paper  ($37 million ’08 operating earnings) and solid bleach sulfate (SBS) paperboard ($19 million ’08 operating earnings). CLW also has a small lumber business which lost $14 million during 2008. CLW was spun off from Potlatch Forest Products Corp. on 12/16/08. Potlatch shareholders received one CLW share for every three and a half shares of Potlatch held.  Please see the exhibits beginning on page six of this document for market data on CLW’s two lines of business: tissue and SBS.

 

Valuation

CLW is trading at 10.6x 2008 free cash flow, 1.6x tangible book value and 7x 2008EBITDA while its peers are trading at 13x free cash flow, 2.7x tangible book value and 9x EBITDA (CLW is lagging on a PE basis). Adjusted for estimated cash received via their participation in the alternative fuels tax credit program (late January 2009 to present) and a debt refinancing completed June 9, CLW’s current market capitalization and enterprise value are $421 million and $525 million respectfully.  The following table outlines their current capital structure and valuation:

 

CLW Valuation & Capital Structure

 

(000 except share price)

 

 

Shares outstanding, 4/29/09

 11,355

 

Performance shares, 3/31/09

 267

2.4%

Restricted shares, 3/31/09

 492

4.3%

diluted share count

 12,113

 

Share price, 7/6/09

 34.80

 

Market capitalization

421,546

 

Cash, 3/31/09

15,829

 

Cash received through 7/3/09 from alternative fuels tax credit

74,177

 

Operating + capital lease obligations, 12/31/08

43,494

 

Debt, 6/9/09

150,000

 

Enterprise value, net

525,034

 

 

CLW’s valuation also appears quite modest in relation to their installed property, plant and equipment (PP&E).  For instance, the ratio of CLW’s gross PP&E to enterprise value currently is 3 while the average ratio for its competitors is 1. On this basis, CLW’s equity would more than triple to reach parity to its competitors.  Interestingly, CLW has one of the least amounts of financial leverage in the industry and, depending on how long the alternative fuels tax credit lasts, may be debt free by year end.

 

While CLW’s valuation is compelling based on 2008 results, it appears to be extraordinary based upon recent developments.  For instance, during 1Q09, CLW generated $15 million of earnings, $23 million of free cash flow and $37 million of EBITDA.  Annualizing these numbers (for the most part, CLW’s business is not cyclical) suggests that CLW is trading at 6.9x earnings, 4.5x free cash flow and 3.6x EBITDA.  We have not included earnings from alternative fuel tax credits in this calculation, but we have reduced its enterprise value by $74 million based upon their earnings from the tax credit through 7/3/09 (thus reducing the EBITDA multiple).  So what has changed since 2008?  CLW was able to increase its pries during Q109 to compensate for higher raw material and energy costs which occurred in 2008. How can CLW raise prices in such a miserable business environment?  The answer lies in CLW’s two business lines:

 

1. Toilet paper – CLW makes 56% of the private label tissue (toilet paper, paper towels, napkins) sold in grocery stores in the U.S. It turns out that toilet paper demand is quite stable despite turbulent economic conditions.  In fact, there is some evidence that private label tissue, CLW’s market niche, actually is benefiting from the economic turndown.

 

2. Juice boxes – CLW supplies 12% of the solid bleached sulfate paperboard (SBS) consumed in the U.S.  SBS is a high grade packaging material and CLW caters to users who demand the highest grades of SBS (juice and milk producers, pharmaceutical companies and high-end printing applications such as the covers of annual reports). CLW’s SBS is of such high grade that it is even exported to Japan, a notoriously discriminating market.  To date, CLW’s SBS business performed well during the current economic turmoil and, to the extent the dollar falls in value, one would expect export demand for their SBS to grow.

 

CLW also has a small lumber business which lost $14 million pre-tax during 2008.

 

Good Business

Business quality may be defined as a business’s ability to earn a return on capital over time, i.e., higher returns on capital over longer periods of time are characteristics of higher quality businesses.  The following table shows the returns earned by CLW since 2004:

 

CLW Return on Assets

Year

EBITDA

EBITDA / assets

2004

 59,000

8.7%

2005

 53,000

7.8%

2006

 101,000

14.9%

2007

 104,000

15.3%

2008

 75,000

11.1%

 

 

 

Mean

 78,400

11.6%

Median

 75,000

11.1%

 

 

 

12 ME 3/31/09

 94,000

13.9%

 

CLW’s returns averaged more than 11% since 2004 and, more importantly, are likely to remain above this average in coming years.  We can make this assertion because, as mentioned above, 2008 was a particularly difficult year due costs increasing faster than CLW was able to increase their prices, a situation which has been remedied.  The below average returns produced during 2004-05 may be explained by CLW’s installation in 2004 of new equipment to make high-grade paper towels in its Las Vegas facility.  CLW’s paper towel business subsequently grew and the wisdom of this investment was corroborated by their higher returns earned in 2006 and 2007.  While 11% return on assets is not outstanding, it is respectable and we therefore conclude that CLW is a good business.

 

Tax Credit

An alternative fuel tax credit provision originally appeared on page 802 of the Safe Accountable Flexible Efficient Transportation Equity Act – a Legacy for Users, known by its acronym, the SAFETEA-LU act or simply the 2005 highway act. (The bizarre acronym resulted from the bill’s sponsor, Representative Don Young, wish to pay tribute to his wife, Lu – I suppose it is the thought that counts). The tax credit was originally intended to encourage operators of vehicle fleets to use alternative fuels, however, Congress extended the credit to manufacturers and other non-transportation applications in the 2007 energy bill. The legislation provides tax credits of 50 cents per gallon of alternative fuel burned by companies; alternative fuels specified in the modified legislation included biomass-based fuel.  

 

The paper-making process starts with wood (logs, woodchips and sawdust).  Paper products are made from the cellulose fibers (pulp) contained in the wood, but the wood contains many other chemicals including lignin, which has high energy content.  The Kraft process is used to separate the cellulose from the lignin and other chemicals.  The mixture of lignin and other non-cellulose byproducts of the Kraft process are called black liquor. Black liquor contains more than half of the energy content of the wood feedstock.  As a result, pulp mills have been using black liquor as a fuel to heat their steam boilers since the 1930s.

 

During 2008, paper industry executives began to realize that black liquor fit the definition of a biomass-fuel (as defined in the 2007 energy bill) and began applying for the alternative fuel tax credits. CLW management got on board in late January 2009. Every two weeks CLW reports to the Internal Revenue Service (IRS) how much “alternative fuel” they burned.  The IRS reviews the calculation and cuts a check to CLW for 50 cents per gallon of alternative fuel burned. CLW burns about 350 million gallons of black liquor annually and has collected about $74 million year-to-date ($455,000 per day).  Though subject to dispute, generally speaking, tax credits are not subject to federal income taxes. 

 

The alternative fuel tax credit program expires on 12/31/09, but it may end sooner for pulp mills. There is a movement in Congress to disqualify paper companies from participating in this program since pulp mills have been using black liquor as fuel for decades. The most likely scenario is that the program will be curtailed on 9/30/09 when the government’s fiscal year ends. The following table shows the economics of the tax credit for CLW.

 

Economics of the Alternative Fuel Tax Credit for CLW

 

 

Incremental tax credit

Cumulative tax credit

Period

# days

(000)

(000)

January 2009

10

 

 

February 2009

28

 

 

March 2009

31

 

 

 

69

$31,400

$31,400

 

 

 

 

April 2009

30

 

 

May 2009

31

 

 

June 2009

30

 

 

July through 7/3/09

3

 

 

 

94

$42,777

$74,177

 

 

 

 

July (balance)

28

 

 

August 2009

31

 

 

September 2009

30

 

 

 

89

$40,501

$114,678

 

 

 

 

October 2009

31

 

 

November 2009

30

 

 

December 2009

31

 

 

 

92

$41,867

$156,545

 

 

 

In conclusion, the data indicate that CLW is a good business trading at a modest valuation with a solid balance sheet. It also appears that CLW’s business is likely to generate solid returns, regardless of the macro economic environment.  Finally, the alternative energy tax credit program has vastly reduced CLW’s net debt position, thus significantly reducing its enterprise value. For these reasons, we plan to purchase CLW shares in the near future.

 

 

Tissues Suppliers to U.S. Grocery Stores

 

 

Share

 

 

Q1 2009

Procter & Gamble

branded

27%

Kimberly Clark

branded

23%

Georgia-Pacific

branded

20%

Clearwater

private label

14%

Other private label

 

12%

Other brand

 

4%

 

 

100%

 

 

U.S. At Home Tissue Market,

Consumption by Product

Toilet

50%

Towel

35%

Napkin

8%

Facial

7%

 

100%

 

 

U.S. Retail Tissue Channels

Grocery

46%

Mass & Supercenter

29%

Club Stores

13%

Drug

7%

Dollar

3%

Other

2%

 

100%

 

 

Solid Bleach Sulfate (SBS) Producers, Market Share

SBS producers

Share

Cumulative

International Paper

25%

25%

MeadWestvaco

22%

47%

Georgia-Pacific

13%

60%

Clearwater

12%

72%

Evergreen

12%

84%

Rock-Tenn

5%

89%

Weherhauser

5%

94%

Tembec Paperboard

3%

97%

Smurfit-Stone

3%

100%

 

 

 

 

Uses for SBS

SBS uses

 

Folded cartons (pharmaceuticals, cosmetics, DVDs)

42%

Cups & plates

24%

Liquid package (juice & milk)

19%

Commercial printing (postcards, signs, brochure covers)

12%

Other

3%

 

100%

 

 

 

 

Catalyst

  • Continuation of the alternative fuel tax credit through 9/30/09 (possibly longer).
  • Continuation of earnings similar to 1Q09 (implies CLW is trading at 5.2x earnings).
  • Initiation of a dividend.

    sort by   Expand   New

    Description

    Clearwater Paper Corp. (CLW) is a good business (EBITDA / assets > 11% for the last five years) at a reasonable price (less than 5.6x trailing twelve month EBITDA, 10.4x 2008 free cash flow, 1.6x tangible book value).  On these metrics, CLW is trading at 30% to 50% discount to its competitors. There are, however, two issues which make CLW an extraordinary value:

     

    1. CLW is earning $455,000 per day tax-free courtesy of the alternative fuels clause contained in 2005 federal highway legislation and modified in a 2007 energy bill. CLW has participated in this program since late January 2009 and, year-to-date, has earned $74 million from it. These earnings are not included in the above EBITDA and free cash flow valuation calculations, but are included in the enterprise value calculation.  The tax credit earnings have cut CLW’s debt in half year-to-date and, if they continue through year-end, the company’s debt will be eliminated.

     

    1. Unlike other paper companies, CLW’s business is thriving and its 2009 earnings, excluding the effects of the aforementioned tax credit, are likely to be significantly higher than its 2008 earnings.

     

    Background

    Founded in 1927, CLW makes tissue paper  ($37 million ’08 operating earnings) and solid bleach sulfate (SBS) paperboard ($19 million ’08 operating earnings). CLW also has a small lumber business which lost $14 million during 2008. CLW was spun off from Potlatch Forest Products Corp. on 12/16/08. Potlatch shareholders received one CLW share for every three and a half shares of Potlatch held.  Please see the exhibits beginning on page six of this document for market data on CLW’s two lines of business: tissue and SBS.

     

    Valuation

    CLW is trading at 10.6x 2008 free cash flow, 1.6x tangible book value and 7x 2008EBITDA while its peers are trading at 13x free cash flow, 2.7x tangible book value and 9x EBITDA (CLW is lagging on a PE basis). Adjusted for estimated cash received via their participation in the alternative fuels tax credit program (late January 2009 to present) and a debt refinancing completed June 9, CLW’s current market capitalization and enterprise value are $421 million and $525 million respectfully.  The following table outlines their current capital structure and valuation:

     

    CLW Valuation & Capital Structure

     

    (000 except share price)

     

     

    Shares outstanding, 4/29/09

     11,355

     

    Performance shares, 3/31/09

     267

    2.4%

    Restricted shares, 3/31/09

     492

    4.3%

    diluted share count

     12,113

     

    Share price, 7/6/09

     34.80

     

    Market capitalization

    421,546

     

    Cash, 3/31/09

    15,829

     

    Cash received through 7/3/09 from alternative fuels tax credit

    74,177

     

    Operating + capital lease obligations, 12/31/08

    43,494

     

    Debt, 6/9/09

    150,000

     

    Enterprise value, net

    525,034

     

     

    CLW’s valuation also appears quite modest in relation to their installed property, plant and equipment (PP&E).  For instance, the ratio of CLW’s gross PP&E to enterprise value currently is 3 while the average ratio for its competitors is 1. On this basis, CLW’s equity would more than triple to reach parity to its competitors.  Interestingly, CLW has one of the least amounts of financial leverage in the industry and, depending on how long the alternative fuels tax credit lasts, may be debt free by year end.

     

    While CLW’s valuation is compelling based on 2008 results, it appears to be extraordinary based upon recent developments.  For instance, during 1Q09, CLW generated $15 million of earnings, $23 million of free cash flow and $37 million of EBITDA.  Annualizing these numbers (for the most part, CLW’s business is not cyclical) suggests that CLW is trading at 6.9x earnings, 4.5x free cash flow and 3.6x EBITDA.  We have not included earnings from alternative fuel tax credits in this calculation, but we have reduced its enterprise value by $74 million based upon their earnings from the tax credit through 7/3/09 (thus reducing the EBITDA multiple).  So what has changed since 2008?  CLW was able to increase its pries during Q109 to compensate for higher raw material and energy costs which occurred in 2008. How can CLW raise prices in such a miserable business environment?  The answer lies in CLW’s two business lines:

     

    1. Toilet paper – CLW makes 56% of the private label tissue (toilet paper, paper towels, napkins) sold in grocery stores in the U.S. It turns out that toilet paper demand is quite stable despite turbulent economic conditions.  In fact, there is some evidence that private label tissue, CLW’s market niche, actually is benefiting from the economic turndown.

     

    2. Juice boxes – CLW supplies 12% of the solid bleached sulfate paperboard (SBS) consumed in the U.S.  SBS is a high grade packaging material and CLW caters to users who demand the highest grades of SBS (juice and milk producers, pharmaceutical companies and high-end printing applications such as the covers of annual reports). CLW’s SBS is of such high grade that it is even exported to Japan, a notoriously discriminating market.  To date, CLW’s SBS business performed well during the current economic turmoil and, to the extent the dollar falls in value, one would expect export demand for their SBS to grow.

     

    CLW also has a small lumber business which lost $14 million pre-tax during 2008.

     

    Good Business

    Business quality may be defined as a business’s ability to earn a return on capital over time, i.e., higher returns on capital over longer periods of time are characteristics of higher quality businesses.  The following table shows the returns earned by CLW since 2004:

     

    CLW Return on Assets

    Year

    EBITDA

    EBITDA / assets

    2004

     59,000

    8.7%

    2005

     53,000

    7.8%

    2006

     101,000

    14.9%

    2007

     104,000

    15.3%

    2008

     75,000

    11.1%

     

     

     

    Mean

     78,400

    11.6%

    Median

     75,000

    11.1%

     

     

     

    12 ME 3/31/09

     94,000

    13.9%

     

    CLW’s returns averaged more than 11% since 2004 and, more importantly, are likely to remain above this average in coming years.  We can make this assertion because, as mentioned above, 2008 was a particularly difficult year due costs increasing faster than CLW was able to increase their prices, a situation which has been remedied.  The below average returns produced during 2004-05 may be explained by CLW’s installation in 2004 of new equipment to make high-grade paper towels in its Las Vegas facility.  CLW’s paper towel business subsequently grew and the wisdom of this investment was corroborated by their higher returns earned in 2006 and 2007.  While 11% return on assets is not outstanding, it is respectable and we therefore conclude that CLW is a good business.

     

    Tax Credit

    An alternative fuel tax credit provision originally appeared on page 802 of the Safe Accountable Flexible Efficient Transportation Equity Act – a Legacy for Users, known by its acronym, the SAFETEA-LU act or simply the 2005 highway act. (The bizarre acronym resulted from the bill’s sponsor, Representative Don Young, wish to pay tribute to his wife, Lu – I suppose it is the thought that counts). The tax credit was originally intended to encourage operators of vehicle fleets to use alternative fuels, however, Congress extended the credit to manufacturers and other non-transportation applications in the 2007 energy bill. The legislation provides tax credits of 50 cents per gallon of alternative fuel burned by companies; alternative fuels specified in the modified legislation included biomass-based fuel.  

     

    The paper-making process starts with wood (logs, woodchips and sawdust).  Paper products are made from the cellulose fibers (pulp) contained in the wood, but the wood contains many other chemicals including lignin, which has high energy content.  The Kraft process is used to separate the cellulose from the lignin and other chemicals.  The mixture of lignin and other non-cellulose byproducts of the Kraft process are called black liquor. Black liquor contains more than half of the energy content of the wood feedstock.  As a result, pulp mills have been using black liquor as a fuel to heat their steam boilers since the 1930s.

     

    During 2008, paper industry executives began to realize that black liquor fit the definition of a biomass-fuel (as defined in the 2007 energy bill) and began applying for the alternative fuel tax credits. CLW management got on board in late January 2009. Every two weeks CLW reports to the Internal Revenue Service (IRS) how much “alternative fuel” they burned.  The IRS reviews the calculation and cuts a check to CLW for 50 cents per gallon of alternative fuel burned. CLW burns about 350 million gallons of black liquor annually and has collected about $74 million year-to-date ($455,000 per day).  Though subject to dispute, generally speaking, tax credits are not subject to federal income taxes. 

     

    The alternative fuel tax credit program expires on 12/31/09, but it may end sooner for pulp mills. There is a movement in Congress to disqualify paper companies from participating in this program since pulp mills have been using black liquor as fuel for decades. The most likely scenario is that the program will be curtailed on 9/30/09 when the government’s fiscal year ends. The following table shows the economics of the tax credit for CLW.

     

    Economics of the Alternative Fuel Tax Credit for CLW

     

     

    Incremental tax credit

    Cumulative tax credit

    Period

    # days

    (000)

    (000)

    January 2009

    10

     

     

    February 2009

    28

     

     

    March 2009

    31

     

     

     

    69

    $31,400

    $31,400

     

     

     

     

    April 2009

    30

     

     

    May 2009

    31

     

     

    June 2009

    30

     

     

    July through 7/3/09

    3

     

     

     

    94

    $42,777

    $74,177

     

     

     

     

    July (balance)

    28

     

     

    August 2009

    31

     

     

    September 2009

    30

     

     

     

    89

    $40,501

    $114,678

     

     

     

     

    October 2009

    31

     

     

    November 2009

    30

     

     

    December 2009

    31

     

     

     

    92

    $41,867

    $156,545

     

     

     

    In conclusion, the data indicate that CLW is a good business trading at a modest valuation with a solid balance sheet. It also appears that CLW’s business is likely to generate solid returns, regardless of the macro economic environment.  Finally, the alternative energy tax credit program has vastly reduced CLW’s net debt position, thus significantly reducing its enterprise value. For these reasons, we plan to purchase CLW shares in the near future.

     

     

    Tissues Suppliers to U.S. Grocery Stores

     

     

    Share

     

     

    Q1 2009

    Procter & Gamble

    branded

    27%

    Kimberly Clark

    branded

    23%

    Georgia-Pacific

    branded

    20%

    Clearwater

    private label

    14%

    Other private label

     

    12%

    Other brand

     

    4%

     

     

    100%

     

     

    U.S. At Home Tissue Market,

    Consumption by Product

    Toilet

    50%

    Towel

    35%

    Napkin

    8%

    Facial

    7%

     

    100%

     

     

    U.S. Retail Tissue Channels

    Grocery

    46%

    Mass & Supercenter

    29%

    Club Stores

    13%

    Drug

    7%

    Dollar

    3%

    Other

    2%

     

    100%

     

     

    Solid Bleach Sulfate (SBS) Producers, Market Share

    SBS producers

    Share

    Cumulative

    International Paper

    25%

    25%

    MeadWestvaco

    22%

    47%

    Georgia-Pacific

    13%

    60%

    Clearwater

    12%

    72%

    Evergreen

    12%

    84%

    Rock-Tenn

    5%

    89%

    Weherhauser

    5%

    94%

    Tembec Paperboard

    3%

    97%

    Smurfit-Stone

    3%

    100%

     

     

     

     

    Uses for SBS

    SBS uses

     

    Folded cartons (pharmaceuticals, cosmetics, DVDs)

    42%

    Cups & plates

    24%

    Liquid package (juice & milk)

    19%

    Commercial printing (postcards, signs, brochure covers)

    12%

    Other

    3%

     

    100%

     

     

     

     

    Catalyst

    Messages


    SubjectQuestions
    Entry07/25/2009 12:43 PM
    Membermacrae538

    Thanks for the writeup. I've also done a lot of work on the company. What do you think normalized EBIT margins are? Clearly, the company had trough margins in 2008, but how high can they go? Many of their costs- caustic and nat gas, especially have fallen off a cliff. Pricing appears to be solid.

    Also, what do you think the equity is worth? I think at least $50 if they receive the tax credits through year end, and if they acquire some more tissue capacity at a fair price with all this cash they are swimming in, all the better. Also, I'd assumed the tax credits were taxable, so if they are not, even better.


    SubjectRE: Author Exit Recommendation
    Entry10/19/2009 09:15 PM
    Membersfdoj

    Chris, why are you recommending exit? CLW still trades at less than 4x EV/EBITDA factoring in the tax credits and FCF generation for the remainder of the year versus peers at 7-8x. The company will likely have net cash at YE versus peers generally at 2-3x ND/EBITDA. And pricing and margins seem to be holding up relatively well. Based on these factors there is still quite a ways to go for the stock be be fairly priced, certainly on a relative basis.


    SubjectRE: RE: RE: Author Exit Recommendation
    Entry10/21/2009 07:03 PM
    Membersfdoj

    Chris, thank you for your response to my question. I have a few thoughts in response:

    1) If you haven't read Ian Zaffino from Oppenheimer's initiation report released yesterday you should. It was the reason for the +12% move in the stock today. He makes many of the same points you do in your excellent writeup, but he focuses as I do more on both the absolute valuation (very cheap) and the relative valuation gap between CLW and its peers and competitors. He is also much more sanguine than you are on the potential for CLW to create value by expanding their consumer tissue business to the east coast and quantifies the opportunity as $1 per share to recurring EPS.

    2) I think you are being too hard on the management regarding the expensive senior note issuance. I agree that 10.625% seems too high for their leverage profile, even though at the time of issuance (6/5/09) it was unclear how long they would be receiving the tax credits and the credit markets were significantly less friendly than they are today. Based on the note's current YTM of 8.9% I calculate the after-tax NPV of the loss due to the higher rate at $10mm, or about $0.88 per share, equal to 1.8% of the current stock price. So it's not insignificant, but it's not the end of the world either. I would be more concerned if they exhibit a consistent pattern of poor judgment; I would attribute this one instance to both bad decision-making and extraordinary circumstances.

    3) I don't think we need to assume that the company will only buy new converting lines rather than distressed ones, nor that expanding eastward with the consumer tissue business is necessarily a bad thing. My understanding is that the location of the factory makes a meaningful difference, and if they are able to locate one close to new east coast customers, it might be more cost effective than buying a distressed line for somewhat less but paying the extra freight costs for the indefinite future. As Zaffino indicates in his report, the logic of expanding to the east coast where private label tissue has a much lower penetration makes a lot of sense. All else being equal I would be happy if the company instituted a dividend as well, but it is not as if they're planning on making acquisitions in unrelated businesses. If that were the case I would be against the idea as you are.

    4) Your anecdote about your lunch with management is interesting, thank you for sharing it. Having not been there I'm not sure what to make of it. It seems possible to me that they felt they would have to issue a press release in light of Reg FD if they were to discuss it with you due to its apparent materiality. You seem to imply that management either did not consider the shut down important enough to discuss or simply neglected to do so and that they were derelict in their duty to you as a shareholder. However, as you point out, you are not the majority owner of the company and as such management can choose to be selective in the timing of disclosure. I agree however that had I been in your shoes I would have also felt that they had not been completely forthright.

    5) Ultimately for me the investment hinges mainly on valuation. While it is no longer a true special situation investment as you point out, we now have more certainty that they will receive the tax credits through the end of the year and the valuation gap versus comps is still on the order of 40%. Zaffino's price target is $65; based on what we know now the stock would have to be closer to $80 to be fairly valued at least on a relative basis.

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