Earnings

Dissecting the Numbers for Neenah Paper, Inc. (NP) and Clearwater Paper Corporation (CLW)

Neenah Paper, Inc. (NYSE:NP) and Clearwater Paper Corporation (NYSE:CLW) are the two most active stocks in the Paper & Paper Products industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect NP to grow earnings at a 11.25% annual rate over the next 5 years. Comparatively, CLW is expected to grow at a 5.00% annual rate. All else equal, NP’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Neenah Paper, Inc. (NP) has an EBITDA margin of 14.49%, compared to an EBITDA margin of 7.99% for Clearwater Paper Corporation (CLW). This suggests that NP underlying business is more profitable. NP’s ROI is 15.10% while CLW has a ROI of 6.70%. The interpretation is that NP’s business generates a higher return on investment than CLW’s.

Cash Flow 

If there’s one thing investors care more about than earnings, it’s cash flow. NP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.55. Comparatively, CLW’s free cash flow per share was +0.88. On a percent-of-sales basis, NP’s free cash flow was 0% while CLW converted 0.83% of its revenues into cash flow. This means that, for a given level of sales, CLW is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. NP has a current ratio of 2.60 compared to 1.20 for CLW. This means that NP can more easily cover its most immediate liabilities over the next twelve months. NP’s debt-to-equity ratio is 0.58 versus a D/E of 1.45 for CLW. CLW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NP trades at a forward P/E of 16.06, a P/B of 3.46, and a P/S of 1.37, compared to a forward P/E of 11.26, a P/B of 1.54, and a P/S of 0.44 for CLW. NP is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. NP is currently priced at a -6.55% to its one-year price target of $83.25. Comparatively, CLW is -24.9% relative to its price target of $60.25. This suggests that CLW is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for NP and 2.00 for CLW, which implies that analysts are more bullish on the outlook for NP.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. NP has a beta of 1.31 and CLW’s beta is 1.09. CLW’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. NP has a short ratio of 1.65 compared to a short interest of 2.09 for CLW. This implies that the market is currently less bearish on the outlook for NP.

Summary

Clearwater Paper Corporation (NYSE:CLW) beats Neenah Paper, Inc. (NYSE:NP) on a total of 8 of the 14 factors compared between the two stocks. CLW is growing fastly and has a higher cash conversion rate. In terms of valuation, CLW is the cheaper of the two stocks on an earnings, book value and sales basis, CLW is more undervalued relative to its price target. Finally, SWM has better sentiment signals based on short interest.

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