This Tissue Maker Is Nothing to Sneeze at

 | Apr 24, 2014 | 6:00 PM EDT  | Comments
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Out of the various boring businesses in the world, I would argue that very few are as boring as selling toilet paper and paper towels. After all, who goes to college and says they want to get in the toilet-paper business? No one. I would bet that over the next 10 to 20 years, no company will be founded that sells only paper products. 

So what you see is what you get in the paper industry. Threat of future competition is low, and I don't care how advanced society becomes, we all need toilet paper and paper towels. As an investor, companies that are in boring lines of business can turn out to be very lucrative investments. 

So last night while I was running through a list of Wednesday's largest-percentage stock decliners, I came across a familiar name. Orchids Paper Products (TIS) fell 10% yesterday. Several months ago when I was looking at TIS, the share price was $33. Today closed at $26.83.

Orchids is a private-label seller of toilet paper, paper towels and napkins. It sells its products to discount stores, dollar stores, wholesalers and convenience stores. This boring business has been anything but for investors. Since 2005, sales have grown to more than $115 million from $57 million. Profit has swelled past $13 million from $1.4 million over that same time. The operating margin has expanded more than 22% from 9%. The share price has not disappointed either -- a nearly fivefold advance over that time, excluding the recent stock-price declines.

At $26.83, the company is being valued at about 16x trailing earnings -- perhaps a tad rich. Nonetheless, at the current price, the yield is now approaching 5% -- nothing to sneeze at. While you may not find many of Orchid's products at major grocery stores, the numbers don't lie. Millions of consumers buy these products every day from dollar store and other retail establishments. The assets of Orchid were bought out of bankruptcy, but the company has a very good balance sheet with just $34 million in long-term debt and other liabilities. Working capital stands at a healthy $23 million.

Wednesday's decline was brought on by an earnings releases that did not meet Mr. Market's expectations. If the selloff continues, this boring small-cap business could produce very glamorous investment returns.

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