Investment Decisions - October 2017 - Part 2

In the next two posts I share my thought process that went into my decisions to add a couple of new stocks to my portfolio. For those who have followed my blog and have taken my investing courses, every stock I analyze I try to answer the following eight questions that usually gives me a pretty good idea if I want to buy or avoid a stock.

Bought shares in Winpak Ltd (Ticker: WPK)

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For those of you who have taken my Everyday Investing online courses, you’ll be quite familiar with this company as I used them as my example case through various modules in the program. Well it turns out that I finally pulled the trigger and bought in.

Question 1: What do they sell? 

Per the Reuters site, "Winpak Ltd. manufactures and distributes packaging materials and related packaging machines. The Company's products are used for packaging of perishable foods, beverages and in healthcare applications. It operates through six segments: modified atmosphere packaging, specialty films, rigid containers, lidding, biaxially oriented nylon and packaging machinery. The Company's packaging is used for markets and applications, including fresh and processed meats, poultry, cheese, medical device packaging, high performance pouch applications and high-barrier films for converting applications. Its specialty films include barrier and non-barrier films, which are used applications, such as printing, laminating, and bag making, including shrink bags. Its rigid containers include portion control and single-serve containers, as well as plastic sheet and custom retort trays, which are used for applications, such as food, pet food, beverage, dairy, industrial and healthcare." It is embodiment of a boring, unsexy company, but a company that provides a vital service to the goods producing industry.

Question 2: Who do they compete with? 

Winpak's main competitors include, Interlope Polymer, Cascades and other materials companies that produce packaging related products.

Question 3: Who buys their product?

Pretty much any good produced needs some form of packaging for display or transportation purposes. A company like Winpak would a go-to company for them. 

Question 4: Will they buy their product over and over again?

If your anticipating selling a lot of your products, you are likely going to need a lot of packaging so you will probably will be going back frequently to a company like Winpak.

Question 5: Does the company make any money?

A quick back of the envelope calculation shows Winpak generated a Return on Invested Capital of 18 percent versus a Cost of Capital of roughly 8 percent so the company is creating solid Economic Profit. Revenues are growing very modestly. It's not a uber growth story. Slow and steady. 

Question 6: What does it own and who do they owe money to?

A quick dive into Winpak's balance sheet shows they have a very strong liquidity level with more than 5 times current assets to current liabilities. They have over $200 million of cash in the bank. The company has no debt. They have very minimal intangible assets. Their balance sheet is rock solid.

Question 7: What risks does the business face?

The company is a bit of an economic bellwether as if the economy is solid than businesses will be selling a lot of goods and will require more packaging materials. If the economy is slow then demand for packaging will likely moderate. Despite the cyclical risks the company historically has managed to consistently generate positive Economic Profit in good times and bad times. 

Question 8: Is the stock cheap?

On a relative basis the stock appears to be on the pricey side. Currently Winpak trades at a multiple of 22 which is high compared to other similar businesses like Intertape  Polymer (14 times) and Tembec (11 times). 

What perked me up about Winpak was that the stock was down over 10 percent on what seemed like OK earnings. The only thing that was worrisome was the company was projecting Gross Margins to fall because of increased resin costs because their main supplier was in the area of the US where the recent hurricanes did some pretty bad damage. These seemed to be short term issues that could resolved as conditions normalize. 

Winpak is to me pretty close to what I would classify as the perfect stock. It sells a core product that constantly in demand. It consistently creates wealth for its shareholders. Their financial position is bullet proof. It's not a sexy, glitzy company. It's a very boring company. They're not going to post hyper growth numbers.  It's a grinding type of business. It's the kind of stock you just buy and put away. So when the stock dropped 10 percent this past month, I thought it was a good opportunity to start slowly building a position.