Ennis Corporation (NYSE:EBF) produces forms and other products for businesses. I believe the company’s risk profile is very low, providing investors with a safe option in the current economic climate.Although the company’s growth history is not long, The outlook is promising and I believe the current valuation leaves investors with a good margin of safety and a good and safe dividend yield. Therefore, I give the stock a Buy rating.
Ennis manufactures and sells a variety of products for the printing industry. The company’s products include forms, financial products, presentation folders, envelopes, and tags and tags. Ennis has a long history, the company was founded in Texas in 1909. The company has kept its operations in the United States.
The company’s products are quite defensive in nature – businesses need office supplies and similar products Stable demand.I believe this is a very good advantage in the current economy because interest rates continue to rise Concerns about a hard landing are growing. As discussed in the financial section, the company’s numbers demonstrate the stability of Ennis’ operations.
Ennis’ share price has remained fairly stable over the past decade, with the stock’s ten-year CAGR of just 2.5%:
Despite lower price appreciation, investors in the company are not getting nearly zero returns thanks to Ennis’ generous quarterly dividend payments; the company’s forward dividend yield is currently estimated at 4.75%.
Ennis’ earnings have been fairly inconsistent throughout its long history. Although the company’s revenue fell 30% in fiscal 2015, the company achieved mediocre 3% growth from fiscal 2003 to fiscal 2023:
This growth hasn’t come entirely organically, though – the company seems to be making acquisitions frequently, most recently the acquisition of UMC Print in June. Speaking of its extensive acquisition history, the company has numerous subsidiaries through which it operates:
While the company’s revenue growth history isn’t great, the company’s solid EBIT margins somewhat make up for it – from fiscal 2003 to fiscal 2023, the company’s margins have been at a record high for almost its entire history. The average has remained between 10% and 15%, with an average of 11.6% and a trailing figure of 13.1%.
Stability is a very valuable aspect in a turbulent economy – I believe Ennis’s dividend yield is very safe due to its stable earnings levels. For example, in fiscal 2009, the company’s operating income fell 24%, a very modest decline compared with most small-cap stocks. The company has also coped well with the currently stagnant economy, with earnings falling only slightly in the first half of fiscal 2024.
While I don’t think the company needs more stability, Ennis provides it with a cash-rich balance sheet. The company has $100 million in cash and no outstanding interest-bearing debt. The cash balance alone accounts for about 18% of the company’s market capitalization (approximately $540 million).
While it doesn’t look like a stock worth buying aggressively, Ennis looks quite cheap at a trailing P/E ratio of 11.9, given the company’s risk profile. The ratio is also below the five-year average of 15.2:
To demonstrate the impact of a low-risk profile on the company and estimate Ennis’ fair value, I constructed a discounted cash flow model. In the model, I estimate revenue will be down 3% this year as demand remains below normal, although the small revenue decline in Q2 FY24 doesn’t indicate much of an impact. Going forward, I expect nominal growth of 2% – the company’s organic growth has historically been quite low, and I don’t necessarily expect the trend to change.
Regarding Ennis’s EBIT margin, I expect EBIT margin for this fiscal year to be 13.0%, which is 0.8 percentage points lower than in fiscal 2023. Additionally, conservatively, I expect margins to decline by 0.5 percentage point in fiscal 2025, consistent with Ennis’ long-term history. I don’t see any specific downside catalysts, but I think there’s merit in staying conservative. The company also has very strong cash flow conversion, as Ennis has amortized significant amounts of money in EBIT due to past acquisitions.
Based on these estimates and a WACC of 7.64%, the DCF model estimates fair value at $33.75, which is approximately 58% above current price:
The weighted average cost of capital used is from the capital asset pricing model:
Ennis has not leveraged interest-bearing debt over the medium term – a trend I expect will continue, as I estimate a long-term debt-to-equity ratio of 0%. For the risk-free rate in terms of cost of equity, I use the U.S. 10-year bond yield of 4.42%. For the equity risk premium, I use Professor Aswath Damodaran’s latest estimate for the US which is 5.91%. Yahoo Finance estimates Ennis’ beta to be 0.46 – the low beta is further evidence of Ennis’ low-risk profile. Finally, I add a 0.5% liquidity premium, resulting in a cost of equity and WACC of 7.63% used in the DCF model.
While investors may not see very high long-term annual returns from this stock, I believe Ennis is a worthy dividend pick due to its lower risk profile. In my opinion, the current price does not fully reflect Ennis’s risk profile and large cash balance. I have a Buy rating on Ennis as the discounted cash flow model suggests very significant upside potential for the stock.