This Canadian stock is re-focusing its business as the use of mailing envelopes declines across North America.
The company has made a series of acquisitions to add packaging and specialty products to its line of products. These new products are contributing a larger percentage of sales and revenue to help offset the decline of envelope sales. While these acquisitions add risk, the company should be able to sustain its dividend, which yields a high 8.0%.
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SUPREMEX INC. (symbol SXP on Toronto; www.supremex.com) is a leading North American maker of envelopes (67% of total revenue) and also sells packaging and specialty products (33% of revenue). The company employs 820 people and operates ten manufacturing facilities in Canada and three in the U.S.
Supremex converted from an income trust to a conventional corporation on January 1, 2011.
The company generates most of its revenue in central Canada (33% of sales) and eastern Canada (30%) as well as the U.S. (23%). Western Canada contributes 14% of revenue.
Electronic communications have significantly reduced the use of envelopes, which means Supremex operates in an industry marked by an overall decline. In response, the company has followed a strategy of acquisition and diversification.
In 2015, Supremex acquired Classic Envelope Inc., a manufacturer and printer of envelopes serving the greater Boston and New York City areas. It also acquired Premier Envelope Ltd., an established manufacturer of stock and custom envelopes, mainly operating in Western Canada.
In 2016, the company then acquired Indiana-based Bowers Envelope Company Inc., a manufacturer and printer of envelopes. At the same time, it purchased Durabox Paper Inc., which is located in Lachine, Quebec, and makes specialty corrugated paper boxes.
In December 2016, Supremex paid $2.9 million for Printer Gateway Inc. The Toronto-based Web-to-Print printer serves the communications and graphic arts industry. However, little more than a year later, in January 2018, Supremex spent $2.2 million to end Printer Gateway’s operations.
In July 2017, the company acquired Stuart Packaging Inc., a provider of specialty packaging for large multinational companies operating in the cosmetics, fragrance and pharmaceutical industries. The purchase price was $17.5 million. At the time of the acquisition, Stuart Packaging had $18.0 million in yearly revenue.
Growth stocks: Raised every year since 2012, dividend yields a high 8.0%
More recently, on April 30, 2018, Supremex acquired Groupe Deux Printing Inc., and its related company Pharmaflex Labels Inc. Together, those operations manufacture premium folding-carton packaging and labels; they also focus on the pharmaceutical industry. Supremex paid $11.3 million for both businesses.
The company’s overall revenue dropped 2.2%, from $131.9 million in 2013 to $129.0 million in 2014. As a result of Supremex’s many acquisitions, revenue has risen since then. It increased 10.3%, to $142.3 million in 2015; 12.9%, to $160.6 million in 2016; and 11.5%, to $179.1 million in 2017.
Earnings fell 4.3%, from $11.5 million ($0.40 a share) in 2013 to $11.0 million ($0.38 a share) in 2014; they then jumped 44.5%, to $15.9 million ($0.55 a share) in 2015 before dropping 8.2% in 2016, to $14.6 million ($0.51 a share). Profit fell again in 2017 by 15.1%, to $12.4 million ($0.43 a share).
For the most recent quarter, ended June 30, 2018, Supremex’s revenue increased 13.8%, to $46.8 million from $41.1 million a year earlier. Earnings in the quarter, increased by 10.6%, to $3.1 million, or $0.11 a share, from $2.8 million, or $0.10 a share. The rising contribution of revenues from packaging and specialty products offset declines in envelope sales.
On June 30, 2018, Supremex had $49.5 million in long-term debt, or a manageable 50.9% of its market cap.
The overall use of mailing envelopes in North America by businesses and by individuals continues to decline. However, Supremex continues to report rising sales in part because it focuses on those segments of the industry that are growing. They include packaging for online retailers. For example, the company makes polyethylene bags for courier applications and bubble mailers and boxes for online shopping.
The company’s growth by acquisition adds risk, but, with the exception of Printer Gateway, it has successfully integrated those businesses.
Meanwhile, in November 2017, Supremex increased its quarterly dividend by 8.3%, to $0.065 from $0.06. The company has added to its dividend every year since 2012. The annual rate of $0.26 yields a high 8.0%, and its dividend appears safe.
TSI Network recommendation: Supremex is okay to hold, but only for aggressive investors.
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