The pioneer manufacturers of lamination film in China.

Tread Lightly: Tredegar Is A Value Trap

by:Top-In     2020-07-30
Introduction/overview of investment at first glance, Tredegar (NYSE:TG)
Seems to be the perfect value game.
At the time of writing this report, the company\'s stock trading was slightly higher than 52-
Weekly lows, the relative valuation is far below the historical average.
The company, which is undervalued and operates in the plastics industry, not only benefits from low oil prices and strong consumer activity in the US, but also has a lot of exposure in the recovering housing and automotive industries.
But Tredegar is a classic value trap.
Just like in the case of companies trading near long-often
The long term lows, which have reasonable reasons for the decline, reflect changes in underlying fundamentals and are unlikely to resume historical valuations.
We think the situation with Tredegar is like this, and after weak second-quarter results confirm that the company\'s business outlook has changed, Tredegar\'s stock has fallen. First-
Half of organic sales (
Foreign exchange loss is not included)
The decline in Y/Y reflects the business loss of P & G, the company\'s main customer (NYSE:PG)
And the price competition pressure of plastic products.
We believe that these developments are not a flash in the pan, but an indicator of continued competitive dynamics that will prevent Tredegar from growing as the terminal grows
Market demand is the same as in the past.
We expect sales to decline.
4% in 2015, earnings per share fell to $ months.
With the company at risk of weakness in China, Brazil and the eurozone, the company faces more disadvantages. At $14.
02, the stock is currently overvalued by 27% relative to our fair price target of $11. 00.
Tredegar\'s over-reliance on P & G and the fragility of the Fed\'s rate hike have caused the company\'s risk profile to tilt downwards in an asymmetrical way, so that even at these depressed levels, stocks are pricing incorrectly.
Tredegar produces plastic film and aluminum profiles.
Film products account for 63% of the company\'s revenue, including plastic materials for various applications, such as sanitary products for women and diapers for adults and babies, food and industrial packaging, electronic display protection, and bathroom paper towels and paper towels.
The aluminum extrusion section is mainly for glass contractors and manufacturers supplying non-residential buildings and building end markets, as well as manufacturers of durable consumer goods, automobiles, industrial machinery and equipment, lighting equipment, and solar panels
65% of the company\'s revenue comes from the United States and Canada, and the rest is distributed equally to Europe, Asia and Latin America.
Zhuo Dejia hopes to achieve far
It believes that the growing middle class will drive consumption and demand for plastic products.
The company has expanded film production capacity in China, Brazil and India, and increased exposure to the automotive industry, as demand for aluminum products that make cars more fuel-efficient is expected to increase.
With the continuous maturity of domestic industry, the development of the company will rely more and more on the foreign market.
Industry structure and competitive position in the next five years, the growth rate of the global plastic products industry should be moderate, volatility should be very low. Due to the wide range of applications of plastics and the increasing preference for alternatives such as glass, wood, metals and paper.
The industry is mature, but technological innovations that allow manufacturers to produce plastic products more effectively without sacrificing performance provide a new source of growth for the plastics industry to gain a share from alternative material producers
In recent years, the industry has experienced large-scale capacity expansion, and many operators have chosen to develop in China because China\'s less stringent environmental regulations make production cheaper than the United States.
Many companies are struggling because of weak global demand, overcapacity and pressure on margins.
The plastic industry is highly competitive and highly fragmented.
The wide range of plastic products limits the ability of most producers who are usually specialized in specific applications or end-use to expand their share.
Due to the limited difference of products, the competition is mainly based on price, but the quality of products is also a factor.
The company invests a large part of its budget in research and development to develop new differentiated products, thus providing a small amount of pricing power.
Significant fixed costs in the company\'s capital structure increase the likelihood of price competition, and operators have shown a willingness to lower prices to protect the quantity.
Companies usually use contract agreements to hedge the impact of rising oil prices on profit margins, but strong buyers (
Can easily switch to products from other companies)
Fierce competition has limited the extent to which companies have increased through costs downstream.
Although the competition in the plastic products industry is fierce, the industry is somewhat isolated from external sources of competition.
Paper, wood, glass and metal-
Thanks to recent innovations, plastic-based products are under limited threat as plastics are more versatile, lighter, recyclable and cheaper.
With the development of technology, plastic products should continue to take a share, but the industry is vulnerable to rising oil prices, which will make plastics more expensive and less competitive than alternatives.
High barriers to entry means that the rapid increase in supply in recent years is mainly due to the expansion of capacity by existing companies rather than the surge in new entrants.
It is difficult for new companies to obtain favorable raw material prices, which makes it difficult for these companies to compete on prices.
In addition, a significant increase
Factories, equipment and R & D require capital expenditure in advance, and the presence of economies of scale reduces the competitive power of new entrants operating at low yields.
Tredegar does not have any competitive advantage to enable it to generate sustainable economic profits, which in fact maintains a weaker position than many peers.
Tredegar serves a wide range of customers and end markets, which is often mistaken for an advantage, and the company\'s exposure is far less diverse than it seems.
The vast majority of the demand in the company\'s plastics sector depends in part on consumer spending, and the company\'s aluminum sales rely heavily on the value of real estate and construction activities.
There is a statistically significant relationship between consumer spending and real estate, so any risk factor that affects consumption or real estate activities is likely to have a residual impact on the other party.
In addition, Tredegar has a highly centralized customer base.
The company\'s revenue in the first quarter was dependent on P & G, which has seen sales decline over the past three years.
P & G has exercised its advantageous position to negotiate lower prices and, as in 2014, move the business to a more relaxed supplier, this resulted in Tredegar losing a large number of major products in the field of personal care in terms of infant care elastic film.
Tredegar\'s small size relative to its competitors is a special disadvantage in industries such as plastics, where prices play such a decisive role.
The company lacks the size and efficiency of many large competitors, which means it will continue to lose market share unless it cuts profits. TG\'s lower (and declining)
Operating profit margins, compared to peers, indicate that the company has accepted discounts to protect sales as competition pressures increase (Figure 1).
Figure 1: the low ROE of peer group analysts relative to peers reflects the company\'s inferior competitive position and is also a product of low financial leverage.
The company increased leverage above historical levels in 2011 to fund major acquisitions, and we expect the D/E ratio to remain roughly unchanged during the forecast period.
With the growth of consumer spending and construction activities, the growth of crude oil, the revenue trend of financial analysis companies (
And plastic input)
The rise in aluminum prices.
Historically, changes in input costs have not had a significant impact on gross margin, as the company has passed most of the downstream cost growth through contracts
By agreement.
The significant relationship between sales growth and gross profit margin over the last five years indicates the economies of scale of COGS, so it is the quantity that determines the Tredegar Gross profit margin, not the cost of the inputs.
Since raw material procurement is the largest component of the industry\'s cost structure, gross profit margin is the most relevant indicator for assessing profitability and competitive strength.
Unfortunately, the company\'s gross profit is not directly comparable to that of its peers, as the company includes pension costs in COGS.
But even after adjusting pension spending, the company\'s gross margin is still well below the industry average.
Compared with peers, there is no real difference between the company\'s pension assumptions or inventory cost calculation methods, and its lower profitability may be the result of a reduction in the number compared to larger competitors.
The decision to incorporate pension costs into gross profit is unique, which makes me wonder if the company chooses to do so in order to cover up fundamental inefficiencies.
On the topic of creative accounting choices, there is evidence that management manipulates revenue by capitalizing certain expenses and undervaluing depreciation.
Limited disclosure of fixed assets in the company\'s filing documents is disturbing.
The company capitalized the expenditure of \"update and improve\", but capitalized the cost of maintenance and maintenance.
While sacrificing the latter is a common practice, Tredegar\'s competitors do not mention capitalization of renewals, and the vague distinction between the two categories gives management the freedom to decide how to deal with these costs
PP & E accounted for 35% of the company\'s assets in history, compared with 33% in the industry\'s history.
This is not a huge difference, but it is enough to show that Tredegar is not spending enough.
In fact, although the asset turnover rate of TG is higher, the asset turnover rate is lower
The industry-related compound annual growth rate reinforces these concerns.
As people expect, a company
The company\'s D & A profit margin is significantly higher than its peers.
Despite Tredegar\'s assumption of longer service life for machinery and equipment (
Up to 20 years13 years)
Than competitors.
We suspect that in order to mitigate the impact of capitalization costs on depreciation expense, the company is extending its service life.
Tredegar\'s recognition of impairment losses every year over the past six years is an evidence of the management\'s idea of exaggerating asset value and gains.
The ratio of net income to operating cash flow is a useful tool for assessing the quality of income.
Any figures that are significantly above or below 1 generally indicate that accrued items account for a large part of reported income, which increases the likelihood of earnings management.
The NI/OCF indicator of Tredegar has fluctuated well below 1 in the past decade, with a median ratio of 0. 34.
As we would expect, depreciation and amortization are the cause of the difference and are actually the biggest \"source\" of cash flow from Tredegar operations \".
The problem of profit quality is often a precursor to poor cash flow quality, and TG is no exception.
Operating cash flow is fluctuating and has no obvious relationship with sales or income.
In addition, the company currently does not generate sufficient cash from its operations to cover capital expenditures, debt payments and dividends, and must continue to increase leverage in the foreseeable future.
It should not be difficult for companies to obtain the additional financing they need. Long-
Fixed-term debt accounts for only 16% of total assets, and interest payments are negligible compared to operating income.
While TG appears to have solvency and liquidity, the fact that PP & E and goodwill account for the majority of total assets is worrying.
Managers often manipulate unamortized goodwill and underestimate the fair value adjustment and depreciation expenses incurred by consolidated subsidiaries during the acquisition.
Tredegar\'s goodwill has increased significantly with the acquisition of 2011, although the company has not recorded any loss of goodwill since then, management\'s suspicious handling of PP & E and depreciation has led us to be skeptical about the reported value on the Tredegar balance sheet.
Based on our fair price target of $11, stocks valued at tredegar are overvalued by about 27%.
00, combined with our FY15 EPS estimate of $0.
68, equal to the positive P/E multiple of 16. 2.
We use the DCF model to derive our estimate, although the implied multiple is 10-
Average year 22.
6. we believe that Tredegar has reached the inflection point where the company\'s fundamentals no longer reflect the past.
Our sales forecast is based on
Sales have declined over the past year as a result of changes in US consumer spending and crude oil prices, both of which have historically been accompanied by growth in TG revenue.
We adjusted the return output to reflect new developments in the Tredegar fundamentals, as well as some additional adverse factors.
Figure 2: US consumer spending (
Demand for plastic products)
It is expected that the next few years will grow at a steady rate, with excess capacity and fierce competition leading to lower prices for various product categories in the company\'s plastic film sector, accounting for most of Tredegar\'s revenue.
The nominal sales of P & G continue to decline, reflecting a reduction in price and quantity.
Our global growth outlook is still low and we expect price pressures to persist during the forecast period as the industry strives to adapt to weak demand.
The current strong momentum in the domestic real estate market is driving aluminum extrusion revenue, but this segment is too small to offset the weakness of thin film products.
We believe that because Tredegar faces two risk factors that could lead to a fall in the stock price, the company\'s risk is tilted downward.
The first is the company\'s reliance on P & G, and if P & G continues to leverage, there is little evidence that the company can prevent further pricing pressures.
Given the supply and demand dynamics of the industry, Tredegar may have to reduce profit margins or risk losing additional business to major customers.
The second risk is related to the Fed\'s upcoming rate hike, which will curb many of the company\'s revenue streams.
Higher interest rates will dampen the demand for aluminium for construction and construction, consumer durables and automobiles, and plastics for the protection of consumer electronics.
Given the company\'s exposure to foreign markets, any appreciation of the dollar will put additional pressure on sales and revenue.
The current weakness of the euro and Brazilian real, as well as the recent devaluation of the renminbi, has led to a decline in Tredegar\'s export competence, resulting in translation losses when the company integrates revenues from foreign subsidiaries
Tredegar continues to expand into emerging markets, meaning the company is now more dependent than ever on the health of the global economy.
External Sales (
In the form of exports from US exports or subsidiaries in other countries)
41% of Tredegar\'s total revenue.
The company has the largest exposure in the euro zone, China and Brazil, and we do not expect the situation in these regions to improve significantly in the next few years.
Pricing pressures and weak volumes will persist until global demand recovers.
Profit margins will fall as production and prices fall.
We expect gross margin to fluctuate around 15.
Between 85% and 2021, this figure was significantly lower than in the previous five years.
The median year is 16. 96%.
Similarly, we want an average operating net profit margin of about 1% cm below its month-year averages.
Figure 3 shows the model assumptions we predict.
Figure 3: The main drawback of revenue growth and commodity as a percentage of sales DCF valuation is that estimates are very sensitive to assumptions affecting terminal value and WACC.
Terminal value based on 5-
The median EV/EBITDA multiple of the year is 7.
11, this is a relatively stable indicator for Tredegar, reflecting the increase in leverage over the past few years.
The median discount to the peer group is 8.
61 it is reasonable that the company\'s growth prospects are weakened and risks increase.
The company\'s WACC is 13.
59% includes an additional risk premium for size and liquidity, as well as an adjustment beta for 1. 66.
Figure 4 shows the sensitivity of our fair price estimates to terminal values and changes in WACC.
Figure 4: Fair value sensitivity of exit multiples, WACCWe supplemented our DCF valuation with analysis from peer group companies to increase our confidence in initial estimates.
The forward P/E ratio of Tredegar was higher compared to the median of the peer group, but the P/B and P/S ratios were lower (see Figure 1).
The average fair price of the Comps model is $21.
This suggests that Tredegar is undervalued by nearly 34%.
However, given the company\'s lower profit margin, lower return on equity and higher beta, we believe the low valuation of TG is necessary.
Figure 5: Comps valuation conclusion initially, Tredegar seems to have all the ingredients of an intelligent value investment, and I was disappointed to find, when studying the rationale, I will change the tone of my work from a long idea to a short 180 degrees.
The company has previously demonstrated its ability to withstand difficult circumstances, but the current industry and macroeconomic environment are different from the past.
Although I think Tredegar can rebound, there are too many obstacles to recovery within a reasonable investment range.
In the past decade, the Fed\'s first rate hike is imminent, and it will be difficult for the company to achieve growth before demand in Europe, China and Brazil picks up significantly.
Disclosure: I/we have no positions in any of the stocks mentioned and no plans to start any positions in the next 72 hours.
This article was written by myself and expressed my views.
I received no compensation (
In addition to Seeking Alpha).
I have no business relationship with any stock company mentioned in this article.
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