Graphic Packaging: High-Quality Business

Charles Hoeveler presented his in-depth investment thesis on Graphic Packaging (NYSE: GPK) at Best Ideas 2016.

Graphic Packaging ($4.1b LTM revenue, $742m LTM EBITDA, $4.2b market cap) is a vertically-integrated, low-cost producer of paperboard in North America and the largest producer of CUK / CRB with ~50% share of each. GPK is the largest operator of converting plants with ~40% share of domestic folding cartons. GPK boasts 52% market share in CUK and 47% in CRB; smaller competitors cannot compete for large customer business. The company has an outstanding management team and corporate governance. The team is comprised of industry veterans with extensive operating and marketing experience. Capital allocation is excellent and focused on IRR. The shares are not optically cheap (17.9x/15.8x FY15E/FY16E GAAP consensus EPS), but GAAP earnings do not reflect economic reality: (i) EPS includes a full 38% GAAP tax rate versus the reality of a 13-20% cash tax rate; (ii) EPS is reduced by non-cash and non-economic amortization of written-up assets from previous M&A; (iii) EPS forecasts not yet adjusted for lower pension expense 2016 and beyond; and (iv) EPS forecasts do not account for high incremental margins from 150k tons of excess pulp capacity.

About the instructor:

Norwood Capital Partners, LP is a concentrated, fundamental value-based long/short investment fund. Norwood relies on primary research to build a portfolio of dominant businesses trading at a discount to intrinsic value. Norwood is managed by Charles Hoeveler, with 15 years of experience in institutional asset management.

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