|Shares Out. (in M):||325||P/E||19.7x||15.5x|
|Market Cap (in $M):||3,318||P/FCF||8.7x||8.5x|
|Net Debt (in $M):||2,201||EBIT||356||438|
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PLEASE NOTE: This is an immediately actionable investment idea given that after the close today Graphic Packaging announced a $300 million secondary offering of stock to be priced tomorrow, February 12. Initial price indication is $9.90-10.00/share (~2.5% discount to today’s close of $10.22). The Company will not receive any proceeds from the offering. Selling shareholders are private equity firms (they have held an interest in the Company for a while and are realizing their investment). This is an excellent opportunity to pick up stock at a discount.
Graphic Packaging Holding Company ("Graphic Packaging") is an attractive long investment opportunity. Through a series of Company actions, including product pricing, productivity improvements, etc. which are described in detail below, the Company should deliver $380 million in what I will term “base FCF” during 2014, equating to an ~12% FCF yield. The Company will also receive an additional $100 million in cash during 2014 through divestiture proceeds and government tax grants. Accordingly, total cash flow to the equity will be $480 million, equating to a ~15% FCF yield. In addition, the fundamentals for the Company are quite strong in that it holds the leading market position in its main lines of business, and it serves end markets which are defensive in nature and very stable. Further, the stock is now “hitting the radar screens” for larger institutional investors because in November 2013 the Company completed a secondary offering of stock after which the average daily traded dollar volume effectively doubled from ~ $16 million/day (2.0 million shares/day at $8/share) to ~$30 million/day (3.0 million shares/day at $10/share). With today’s announced secondary offering of stock, the free float and trading liquidity will increase even more. Now that more institutional investors can buy the stock given the increased liquidity, there should be a large amount of new “marginal buyers” which should place upward pressure on the stock’s price.
In 2015, the Company should generate ~$1.20 in FCF/share. Valued at a 9% FCF yield, that equates to a share price of $13.30, over 30% higher than current levels.
EBITDA Bridge from 2013 to 2014: The Company’s EBITDA should increase from $670 million in EBITDA in 2013 (see 4Q13 8-K filing for EBITDA calculation) to $715 million in 2014 due to the factors listed below:
Of note, the projections above do not include any volume improvement in Graphic Packaging’s business. Any improvement represents a source of additional upside.
EBITDA to “Base FCF” for 2014: Starting with $715 million in EBITDA as calculated above, Graphic Packaging should generate $380 million in “base FCF” in 2014:
Additional, Non-Recurring Cash Items in 2014: In addition to the $380 million in “base FCF” Graphic Packaging should generate in 2014, the Company should also receive an additional $100 million in cash during 2014 from the following non-recurring items:
For reference, with only very modest top-line and cost growth in 2015, the Company’s “base FCF” should increase from $380 million in 2014 to $390 million in 2015, or to ~$1.20/share. Over the next 6 months, the market should “roll” its valuation metrics forward and value the business on 2015 FCF. At a 9% FCF yield, the stock should be worth $13.30, over 30% higher than current levels. Of note, management has shown their willingness to repurchase stock (they bought $200 million worth in the Company’s November 2013 secondary offering). If the Company repurchases stock during 2014, the $1.20 in FCF/share in 2015 could prove to be conservative.
Volume demand in Graphic Packaging's Paperboard Packaging segment is mainly driven by the general consumption of consumer staple products, which has typically increased at ~1.0-1.5% annually. However, Graphic Packaging has been encountering weakness in beverages, specifically carbonated beverages, as consumers have been shifting to healthier alternatives. To be conservative, the financial analysis of the Company detailed above does not include any volume growth for the business.
NOVEMBER SECONDARY OFFERING
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