MOD-PAC is a high value-added, on-demand print services firm that is focused on the design and manufacture of folding cartons. It also has a personalized print product line.
The term folding cartons is the box packaging you see in cereals and box packaging with designs on it. Serves all sorts of products. Mainly for retail sales. Personalized print is customized printing for such things as letterheads, business cards, posters, invitations, cards etc.
Why is it Cheap? / Is it Cheap?
- Very small company
- Operates in a very competitive industry
- Competition consists of both large corporations to small independent companies
- Exited commercial print business in 2009 as revenue deterioted after losing vistraprint in 2004. The impairment caused a drop in earnings.
- Was spun off from Astronics in 2003. A totally unrelated parent.
Management
- Daniel Keane is CEO. Kevin Keane is chairman of board. Must be father and son combo. Not an independent board at all.
- Strong insider ownership. Inside executives and directors own 33.5% of class A stock.
- Daniel Keane and Kevin Keane own 48% of class B stock.
- Total executive compensation in 2010 made up 3% of revenue in 2010. Not something that I like. 3% is borderline, which really means it is too high.
- Not much insider buying except in Oct 2011 where a few insiders bought in the open market. Majority of insider activies is stock option acquisitons.
- The company has never really outperformed its peers, but bonuses are always given.
- CEO get his "club fees" of $13,858 paid by the company, personal finance planning fees paid, tax return preparation expenses paid. COO gets similiar benefits. Why isn't the CEO and COO paying for this themselves? It has nothing to do with the company.
- From what I can tell, management is looking out for their own interests first.
Growth
- Not much growth that MPAC can achieve. It is operating in a niche where it has basically filled the position that it is in. Only way to grow is to acquire other companies, but current financials do not support this.
- MPAC isn't big enough to get national customers. Has to work within regions where they are located.
- Personalized print business is not a good business model. Even more competition.
Strategic Advantage/Moat
- No moat.
- MPAC does have a strategic advantage in that it is more nimble and efficient that bigger competitors, but also can handle more capacity than the small companies which help to keep their prices low.
- Their main advantage that comes up often in the annual report is that "MOD-PAC’s focus is on niche market opportunities requiring short print runs, which capitalize on our efficient processes and operations to meet customers’ highly variable needs." – In other words, short run printing.
- Short cycle time means they don't have to lock in futures contracts to purchase raw materials. They also don't need to hold much inventory.
Competitors
- Highly fragmented and competitive industry.
- Unable to compete with bigger players.
- Bigger competition also have integrated paper business which makes them efficient and cost effective in long run printing.
- Competes with many other smaller mom and pop companies.
Risks
- Customer concentration. About 30% of sales come from two customers.
- Intense competition
- Needs to regularly upgrade equipment to maintain edge over smaller shops as well as keep pace to some degree with bigger competitors.
- Company will remain in stalemate mode and where shareholders will lose out.
Valuation
- Off balance sheet liabilities consists of leases.
- Revenue has remained flat for 5 years. TTM is better due to additional revenue from folding cartons business.
- Margins have declined for years and only now seeing some slight improvements.
- Shareholders equity has also been flat. No shareholder value growth.
- FCF hovers slightly above or below the zero line.
- Average ROE over 10 years is 3.8%
- Average ROA over 10 years is 1.9%
- Average CROIC over 10 years is 2%
- Inventory age increasing. In 2007, it was 31 days. In 2010 it is now 47 days.
Catalysts
- MPAC could be the one to get bought out.
- Signs a new big contract that diversifys customers away from the current two. No such news of anything like this though.
- Management's plan to increase growth in folding carton business succeeds.
- Company buys back shares
Conclusion
Was interested in the business after reading that it was spinoff but from the looks of the company, the parent was the one with hidden value. Operates as a niche player in a competitive industry with ineffective management. Company is not positioned to grow and does not have the firepower needed to generate growth.
Easy one to throw in the pass pile.
Verdict
- Management: C
- Growth: C
- Moat: C
- Risk: B
- Valuation: C
- Overall: C
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