To many investors, it may seem that the packaging industry does not offer many opportunities. It may not be the most exciting space to invest either. However, the fact is that there is there are a few quality players in this space who have done well in recent years. A really solid but small trader that deserves the attention of investors is Ranpak Holdings (NYSE: PACK). The company’s revenue continues to grow and its economic results have been generally positive. The company hit a slightly lower point in the first quarter of this year, but management is guiding revenue will continue to rise year after year. While it is entirely possible that the company may reach a weak point in the event of a wider economic recession, stocks are cheap enough today, both in absolute terms and in relation to similar companies, to deserve a long-term advantage. time limit.
Understand Ranpak Holdings
First, Ranpak Holdings is positioned as a provider of packaging solutions. To better understand the company, however, we should first talk about its two main product lines. At the top of the list is what management refers to as the Protective Packaging Solutions (or PPS) business. Through this, the company offers a variety of products designed to meet the needs of e-commerce companies and other shipping companies. These products fall into three different categories.
One of them is called Void-Son. And according to management, products in this category can best be described as paper that is used to fill empty spaces in secondary packages in order to protect objects within the same packaging. If you’ve ever ordered a set of glasses by mail, you’ve probably received them with folded brown paper filling the empty space inside the box they came from so that the glasses don’t move unnecessarily. This is precisely what we are talking about here. During the company’s fiscal year 2021, these products, sold under the FillPak brand, accounted for 40.2% of the company’s revenue.
The second category is known as cushioning, and the company’s systems, under this category, convert the paper into cushioning pads by gluing the paper to trap air between the layers in order to protect the objects inside the boxes. of external shocks and vibrations during the shipping process. These products are sold under the PadPak brand and accounted for 42.4% of the company’s revenue in 2021. The company also has a category called Wrapper. Their systems here create pads or paper mesh to securely wrap and protect fragile items from bumps and surface damage that occur during the shipping and handling process. The company also uses these products to line up boxes and provide separation when shipping multiple items. Depending on the address, the brands with which they are sold include WrapPak, Geami and ReadyRoll. During the company’s fiscal year 2021, these products accounted for only 13.5% of the company’s revenue.
What is interesting about this product line is that the company sells real systems dedicated to converting these packaging products from their basic components into the final product in question. For example, at the end of fiscal year 2021, the company had 78,000 FillPak units installed worldwide. It also had 35,000 PadPak units and 21,000 WrapPak units. Instead of just selling these products, the company prioritizes continued ownership over them. Instead, it focuses on renting them out to its customers. In addition, of course, it also generates revenue for the consumables used in the process.
There is another source of income for the company that deserves attention. And that’s what management is all about for its automation products. These are automated systems that help customers optimize their own shipping experience. For example, a device called Cut’it! EVO grabs boxes and, using a sensor to detect the highest stacked item inside the box, resizes the box so that customers can use uniform box sizes, receive custom box sizes ready to ship, and, as a result, send more boxes on a single pallet. . The company also has other similar products focused on handling packaging in a different way. These devices are usually sold directly to their customers, while other devices that focus on helping users automate the processes of filling gaps and closing boxes are usually kept by the company and rented. Unfortunately, this is a small part of the business, accounting for 3.9% of revenue last year. However, management has expressed interest in further growing this part of the company and has made some major investments in this regard.
Although Ranpak Holdings has a long operating history, it is best to look at the company through the lens of its performance over the past three years. This is because, in 2018, the company agreed to merge with One Madison and this combination calls into question year-to-year comparability issues. The performance data we have, however, has been quite impressive. Consider income. From 2019 to 2021, the company’s sales increased from $ 269.5 million to $ 383.9 million. Unfortunately, the company has experienced some pain so far this year. Management expressed disappointment when last quarter’s revenue reached just $ 82.5 million. In fact, it has dropped 5.9% compared to the $ 87.7 million generated the same time a year earlier. Despite this blow along the way, management said revenue for the full year 2022 should be robust, with sales increasing by 13% to 18% compared to what the company achieved in past.
In short, the image has also been generally favorable for the company from the point of view of cash flow. While net income has been consistently negative for the company in recent years, its operating cash flow increased from $ 26.3 million in 2019 to $ 54.3 million last year. If we adjust to changes in working capital, cash flow would have increased from $ 25.7 million to $ 77.9 million. Meanwhile, EBITDA nearly doubled, from $ 62.1 million to $ 117.8 million. For the current fiscal year, the company, once again, has encountered a bit of a lockout. In the last quarter, the business generated a net loss of $ 14.1 million. This compares to the net profit of $ 6.3 million reported a year earlier. Operating cash flow rose from $ 12.5 million to $ 9.4 million negative. If we adjust even to changes in working capital, this metric would have gone from $ 22.3 million to $ 12.1 million. During that time, EBITDA also suffered, going from $ 28 million to $ 19.1 million. Despite these concerns, management is cautiously optimistic about the current fiscal year. They believe that EBITDA will range between 2.5% lower than last year and 6% higher than it was. At the midpoint, this would see the metric increase to $ 120 million.
With the data we have, it’s not too hard to value the business. If we assume that operating cash flow will change at the same rate as EBITDA, we should anticipate an adjusted reading of operating cash flow of $ 79.4 million. This would result in a price at the adjusted operating cash flow multiple of 7.7. This is lower than the 7.9 reading we get with the 2021 results. Meanwhile, the company’s multiple EV to EBITDA would be 7.8. This compares favorably with last year’s 7.9. To put this in perspective, I compared the company to five similar companies. Depending on the price in the operating cash flow, these companies ranged from a minimum of 4.8 to a maximum of 35.1. Only one of the five companies was cheaper than Ranpak Holdings. Using the EV approach to EBITDA, we ended up with a range of 8.2 to 41.6. In this case, Ranpak Holdings was the cheapest in the group.
|Company||Price / Operating cash flow||EV / EBITDA|
|Pactiv Evergreen (PTVE)||4.8||8.3|
|Sonoco Products (SON)||35.1||41.6|
|Graphic Packaging Holding Company (GPK)||10.9||12.0|
|Sealed Air Corp. (I WILL SEE)||12.9||10.7|
|Packaging Corporation of America (PKG)||10.6||8.2|
Based on the data provided, I believe Ranpak Holdings is a unique company that will likely continue to operate well in the long run. It will be interesting to see if management’s expectations for the year turn out to be right. Even if the company sees its financial situation weaken as it moves forward, the shares are priced low enough that I find it hard to believe that investors can have a significant downside on the table. That’s why I decided to value the company as a “buy” right now.