EBF - Ennis: A Good Business In A Dying Industry

Summary

• Ennis has been a good legacy business for over 100 years.
• The company faces major secular headwinds in a dying industry.
• I personally would rather see a consistent buyback strategy implemented instead of mostly dividends, combined with taking minority stakes in newer, digital competitors.
• The 4.7% dividend isn't very appealing when attached to a no-growth business and industry.

Ennis (EBF) is the largest producer of paper business forms and other business products in the US. It's a classic American story of business success of one person starting a small business that would become a big and enduring enterprise lasting over 100 years. They have 55 facilities in the US, and have been a serial acquirer for decades now.

Below is the long term share price CAGR:

The industry is permanently in decline, so R&D is not needed, and the company appropriately doesn't spend much on it. Global paper and pulp is estimated to grow at a mere 0.72% till 2029.

Being in such a declining industry, there aren’t many publicly traded competitors. There are primarily digital competitors such as ARC , but the comparison will be among physical paper companies. Below are the return metrics for each:

Source: quickfs.net

Capital Allocation

This has certainly been a stereotypical dividend paying stock. They repurchase shares in smaller amounts, but the emphasis has always been on dividends and acquisitions. Share count hasn’t been reduced by any significant amount in the long run.

I personally would rather see a consistent buyback strategy implemented instead of mostly dividends, combined with taking minority stakes in newer, digital competitors. This is a far easier plan than transitioning the entire business model from tangible to digital. I’m not bothered by the frequency of buyouts, but I would still rather see most of free cash flow dedicated to buybacks, equity stakes in digital competitors, and finally acquisitions only if truly distressed assets are available.

Risks

Overall the balance sheet is in great shape. EBF does tons of acquisitions and pays down lots of debt as well. Currently there is almost no debt, and $91.2 million in cash. The secular decline of the industry is by far the biggest headwind. The specific problem is the lack of emphasis in shifting to the digital side of the industry. I would rather see them take minority stakes in digital competitors rather than trying to serial acquire their way out of a dying industry. We can see that by the fact that revenue has basically been flat for around fifteen years.

Don’t let the healthy balance sheet and relatively predictable free cash flow and earnings fool you. This is a good company in a horrible industry. While not in any risk of imminent bankruptcy, they are in trouble in the long run as they are fighting the paperless trend. Software is absolutely eating this sector and as an investor you need to fully comprehend this. To own a stock like this means you will get basically no fundamental business growth, and your returns will only come from dividends and multiple expansion.

As the first table showed, the returns on invested capital are below average and not very stable. These returns are bound to go lower as the industry continues to decline.

Valuation

The most compelling reason to invest would be the current dividend yield of 4.7% backed by relatively stable cash flows and little debt. Relative pricing shown in the multiples doesn’t reflect much of a discount, but the lack of close competitors lessens the importance of comparing multiples.

Source: quickfs.net

Below is the DCF model.

The company is not investable for me at almost any price, simply due to the combined secular headwinds of this specific sector and lack of effort to adapt on management’s part. An attractive dividend yield loses all of its luster when I see the underlying company has virtually no growth potential. A dividend paying stock is not just a security that generates income for you. It’s still partial ownership of a cash flow producing enterprise, and this enterprise faces heavy pressure from secular trends. Ignore these underlying fundamentals at your own peril.

Conclusion

EBF is a great example of an American business success story that provided value to consumers for many decades. The current reality is that the physical paper document industry will shrink to almost zero at some point. The company itself has a healthy balance sheet and an attractive dividend yield, but this comes attached with secular headwinds which all but guarantees no fundamental business growth will occur. I try to take an extremely long-term horizon with any investment, and the long=term future for this business is very bad. I do think this could have been avoided if free cash flow had been prioritized to reducing share count and investing in young competitors. The 4.7% dividend is not worth a business that is guaranteed to not grow top line or earn higher returns on capital.

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