This week’s Stock of the Week recently spent a lot of money to extend its geographic footprint. This hasn’t made every investor happy, but it does create an opportunity.

Paper It Up

Orchids Paper Products Company (TIS) has been building a state-of-the-art paper-processing plant in South Carolina and bringing it online—and now is starting to reap the benefits. But many investors still are looking backward at results that do not include the new plant operations, the $170 million in debt that Orchids took on to build it, and the higher fiber costs that temporarily depressed profit margins while the plant was being built. That shortsightedness gives savvy investors a buying opportunity.

Orchids makes paper towels, bathroom tissue and paper napkins primarily for private labels. Customers include warehouse stores, super centers, dollar stores, grocery stores and other discount retailers. Orchids also sells so-called parent rolls—ones not yet finished into final salable form—to other paper-products manufacturers that turn them into the final products.

Paper-product shipping costs are high, so plants must be close to the product’s ultimate destination for a firm to make money, typically less than 1,000 miles, ruling out foreign competition. Orchids built its new plant to improve its geographical footprint. Also, consumers now increasingly want ultra-premium tissue products, which the new plant can produce at a lower cost than competitors. The plant opened in summer 2017, and it already has more than 80% of its capacity contracted to customers. Orchids had revenue of $164 million in 2016, which will likely be reported to have grown to $168 million in 2017 and $201 million in 2018.

Fiscal year: December. Earnings per share: 2018 est./$1.40…2017 est./$0.02…2016/$1.24.

Scott W. Hood, CFA, is CEO and portfolio manager at First Wilshire Securities Management, Pasadena, California, which manages $410 million.

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