A Checkup on Veritiv

GuruFocus.com

- By Praveen Chawla

I last wrote about Veritiv Corp (NYSE:VRTV), a previously "busted" distributor of paper and packaging products, about a year ago. A lot has happened since, including the Covid-19 pandemic.

The company has been through a lot of volatility bouncing in the single-digit stock price range and is now back in the '20s. However, it is still trading around tangible book value and much below book value, so I think it has a lot further room left to run.


A Checkup on Veritiv
A Checkup on Veritiv

Veritiv is a North American distributor of packaging material, facility solutions and paper products. It was created by combining International Paper's (IP) distribution unit and Unisource, which is owned by Bain Capital and Georgia-Pacific.

The company operates in four segments: packaging, facility solutions, print and publishing. The packaging segment is growing, the facilities segment is steady while the latter two are declining.

The purpose of combining was to lower costs and squeeze out synergies, while consolidating a mature market. The game plan was to do this by streamlining supply and distribution chains, combining warehouses and simplifying processes, which would result in lower costs and increased pricing power. While the company IPO'ed in 2014, Mr. Market soured on it quickly, sending its stock from the mid-50's in 2017 to single digits last year.

Seth Klarman (Trades, Portfolio)'s Baupost Group owns 22.43% of the outstanding shares of the company and Bain Capital owns 8.7%, which is reduced from 17% last year.

My thesis for going long Veritiv was that after it had consolidated operations, it would be able to increase free cash flow, reduce working capital and deleverage the balance sheet. The company continues to make good progress with these metrics. It has also recently replaced its CEO.

Free cash flow and working capital

The following diagram lays out Veritiv's cash flow over the last five years. A lot of the company's net worth was caught up in working capital (including inventory and accounts receivable). The company has worked hard to free up this working capital and used the money to deleverage. While the working capital reduction is only temporary, even without it the company's core FCF is now $66 million, up from $32 million last year (Core FCF is FCF minus changes to working capital, which is represented by the orange line in the chart below). Note that FCF is over-stated because of the rapid reduction of working capital.

A Checkup on Veritiv
A Checkup on Veritiv

(Click for larger image)

The following diagram gives details of the working capital. As we can see, working capital was reduced from $1234 million to $790 million in less than two years.

A Checkup on Veritiv
A Checkup on Veritiv

(Click for larger image)

Much of this freed working capital has been used to pay down long term debt:

A Checkup on Veritiv
A Checkup on Veritiv

(Click for larger image)

Conclusion

Looking at the set of industrial distributors, I think Veritiv should be worth between 1 to 2 times book value on a going basis. Assuming a price-book ratio of 1.5, this works out to a stock price of $50. In my opinion, in spite of more than doubling from the pandemic lows, this Klarman stock is still excellent value and has long way to go. Given the current overvalued state of the markets, I think it is more likely that a stodgy distributor like Veritiv will double from here in the next three years than the big tech stocks, and I am putting my money where my mouth is.

Disclosure: The author owns stock in Veritiv Corp.

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