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    Tuesday
    Dec112018

    Buy Business Forms?

    In that famous investment tome, “Gone with the Wind,” Rhett Butler remarks, “I told you once before that there were two times for making big money, one in the up-building of a country and the other in its destruction. Slow money on the up-building, fast money in the crack-up.”

    So it may be with the crack-up of industries. There were once independent storage companies in every town that belonged to the association of storage companies. They convinced each other that billions of records would be digitized and that their customers would no longer pay rich fees to stack boxes in dark warehouses and pay forever to store them. In their fear of the digital apocalypse, the storage companies sold out cheaply to Iron Mountain (IRM), which is still milking the cash flow from many of the same boxes. IRM has a market cap of $9.7 billion. The digital wave did not break as quickly as people thought it would.

    The same may be true for printers – particularly for business forms and checks. A prominent Philadelphia check printer called Safeguard Business Systems had a healthy cash flow, and spun out Safeguard Scientifics (SFE), which famously backed Novell and many other tech leaders of the 80s and 90s. In 2004, another check printer, Deluxe (DLX), acquired Safeguard Business Systems. DLX continues to print checks, acquire companies, increase sales by about $100 million every year, earn about $200 million, and pay a 2.5% dividend. DLX has a market cap of $2.3 billion. However, its debt has swelled to $891 million and insiders had net sales of 253,000 shares in the last 12 months.

    I prefer Ennis, Inc., which used to be called Ennis Business Forms, so the stock symbol is EBF. Ennis pays a 4.6% dividend, has only $30 million in debt, and insiders have in the last 12 months bought the stock 12-to-3, though the net purchases have been only slightly positive. Still, since insiders have many good reasons to sell their stock – buy a car, pay for college, pay taxes, get divorced – and only one good reason to buy – they think the price will increase – any net insider buying is very positive.

    By the way, insider purchases are not well documented on discount broker platforms. I find the “Insiders” tab at www.nasdaq.com to be the best free source of insider trading information.

    Ennis has underperformed the market, which seems like a bad thing until you consider what happened recently to companies that have outperformed the market: they fell between 20 to 50%. Owning a traditional company with a nice dividend and room to grow might be a decent addition to your portfolio.

    There are two positions on dividends: one is that dividends demonstrate a lack of ideas for deploying capital (wouldn’t it be better if the dividends continued to compound growth within the company so that you could sell later and pay only a 15% tax?); the other is that dividends account in some studies for about 30% of gains in the market. Also, maybe managers aren’t really that smart, and they should enforce the discipline of distributing some money to shareholders.

    In some ways, owning stock is like being a retailer: you buy the stock and put it on the shelf in the hope that someone will pay more for it later. If your stock is out of fashion, which is a good way to buy low, you may have to wait a while for it to appreciate, so I like stocks that pay a decent dividend. They pay you while they sit on the shelf.

    In the last four quarters, EBF has earned about 7.4% on its Enterprise Value – that is, the price that you would pay to buy the entire company net of cash and debt. By comparison, DLX has earned 5.8%. Like Iron Mountain, EBF is acquiring other companies in its industry, and investing in some new ones. Ennis’ press releases are filled with subsidiaries like Ardmore Folders, Wright Business Graphics and Allen-Bailey Tag & Label.  And if you have bought a car, taken a loan, or been to a doctor lately, you know that business forms show no sign of disappearing.

    Ennis is selling at $18.16 today, and has traded between $18 in May and $22 in August. EBF does not have the tech appeal of Nordic Semiconductor or Aumann AG, but it makes money, pays a dividend, could grow steadily, or, at only $437 million in Enterprise Value, would be a nice acquisition for a larger company – even Iron Mountain that could encourage its customers to print more forms to store in its warehouses.

    Of course, there is much we cannot know about any company and the future economy, but Ennis Inc has demonstrated an ability to turn a profit and pay a dividend, and it could provide positive returns for your portfolio.

    To comment, suggest a perfect company, or ask a question, please email me at gpaul@perfectcompany.com

     

     

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