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 Orchids Paper Pro (NYSE AMEX:TIS)

Friday, November 6, 2009

On Wednesday, Oct. 28, Orchids Paper reported its 2009 third quarter results, posting solid earnings per share gains. This marks seven straight quarters of increased sales and EPS.

  3rd Quarter 2009 3rd Quarter 2008 Period Change
GAAP Revenue $24.6 M $23.3 M 5.58%
GAAP EPS $0.52 $0.22 150.00%
Fully Diluted Shares 7,304,226 6,499,686 12.38%

The GeoTeam® listened to the Orchids conference call, seeking updates on the planned expansion of its converting paper operations.

The Company offered some insight into when its operations may begin to realize benefits from its plant expansion initiatives. Management indicated that it is on track to complete it converting line expansion by the end of the 2010 second quarter. It also believes that the new line will be in operation at full speed during the 2010 fourth quarter.

What Does this Mean for Orchids Financial Outlook?

Orchid's converting line business is currently operating at full capacity. This is evident by the gradual decrease in Orchid's revenue growth to approximately 5% in the third quarter. The company had experienced greater than 20% growth in 2008 and 2007. It is certainly impressive that even as revenue growth has eased, Orchid's profitability has strengthened as the Company is benefiting from recent cost savings initiatives.

Orchids Paper understands that revenue growth will have to eventually resume. The Company is banking on the addition of a new converting line and storage supply facility to fuel this growth as well as deliver $800 thousand to $900 thousand in annual cost savings.

Recall that Orchids also manufactures bulk paper rolls which it sells to customers who then convert paper into an end product.

Orchids Paper Product flow

1. Manufacture bulk paper (Annual Capacity of about 54 thousand tons)
2. Convert bulk paper into a private label finished product such as tissue to sell to customers like Dollar General. Annual converting manufacturing capacity is about 7 million cases (or about 42 thousand tons of bulk paper use)
3. About 12 thousand tons of paper roll supply available to sell into the market.

Orchids Paper achieves higher margins on its converting operations, which also has a more favorable growth profile compared to its bulk paper roll operations. Ideally, the Company would prefer a situation in which it could convert all 54 thousand tons of its paper rolls. That is precisely why Orchids Paper is installing another converting line. At full capacity, the Company will soon be able to produce 11 million cases (66 thousand tons) . It will be able convert its entire 55 thousand tons of paper capacity into final products. At full capacity Orchids Paper will also have to purchase about 11 tons of paper rolls in the open market.

Near-Term Growth

We think the next two quarters will still show impressive EPS growth and that revenue growth will resume above average growth in the 2010 third quarter, propelling EPS levels to new levels. The second quarter of 2010 may result in a flat EPS quarter, but we are postulating that investors will downplay this given

  • The growth opportunities present as the Company heads into the second half of 2010
  • The company's history of consistent growth.

Our assumptions may be conservative as bulk paper sales are beginning to strengthen and could provide for some upside surprise. Of course, this will be a non issue once the new converting line is operational and Orchids Paper will use all of its paper roll needs internally. We also have to monitor raw material costs such as recycling paper prices, which has been on the rise.

Thursday, February 26, 2009

GeoBargain Update:

TIS now meets the minimum Return on Equity requirement of 15%.

The GeoTeam® prefers the Debt to Equity Ratio to be under 20%.  TIS ratio is currently over 60%.

Wednesday, February 4, 2009
  • The firm is nearing the GeoTeam® Return on Equity (ROE) requirement. 
  • The Geoteam® would prefer the company to reduce its debt position.