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  Banking on Intertape to make its turnaround stick

BENJ GALLANDER and BEN STADELMANN

Friday, February 8, 2008

The landscape in this country has changed greatly over the last few years. The Canadian dollar has sprouted wings, and while we think it is silly that the constant characterization is of the "high Canadian dollar," we won't argue that it has appreciated.

Naturally, this makes it harder for companies in this country to compete; there has been an accompanying hollowing-out of major corporations in Canada, with many succumbing to foreign takeovers. When it comes to reining in these transactions, the government remains toothless, effectively putting more of our future and profitability in foreign hands.

How sad that the leaders who are decisive in so many ways — often for the wrong reasons — in this case show backbones of Jell-O. Anyhow, at the end of the day, there are fewer potential Canadian enterprises in which to invest.

But as the 2007 tax season waned, we finally found a Canadian outfit on which to pull the trigger. The candidate was Intertape Polymer, a company that is interlisted on the NYSE. This stock has suffered a miserable decline since touching almost $50 towards the millennium, better than 18 times our cost of $2.66.

Heck, with this kind of pricing history, one might think it was in the high-tech field, instead of plastics and packaging.

The enterprise looks like it is in turnaround mode. After losing money since 2005, the firm eked out a profit last quarter. Revenues have been increasing, cresting $800 million last year. Cash flow is positive and long-term debt was reduced by about $60 million year over year.

A rights offering was partially successful. Designed to raise $90 million, about $62 million came through the portal at $3.44 (USD) or $3.61 (CAN) a share. Some of this was from insiders, a plus when looking for reasons to buy into a company.

Perhaps insiders are kicking themselves somewhat. Three of them balked last year when Littlejohn Fund III offered a buyout at $4.76 per share. The board of directors recommended it and said they would resign if the deal did not go through. It did not, they bid adieu, and the stock price tanked.

The new management, however, might be perceived in some quarters as "same old, same old." Founder and executive director Mel Yull stepped out of retirement to attempt a corporate resurrection. His goal is to hand off the organization after the turnaround is accomplished. No firm timetable for this has been made public.

Some tough sledding remains before a recovery is complete. The economy, particularly the slowdown in housing, will hit the business, as this is a key sector for their products. The debt load, though less onerous, still must be contended with. And there are a couple of tough competitors in the field, including giant 3M and AEP Industries. They won't want to give up market share during a period when the pie isn't getting bigger.

Intertape, though, has some other ingredients going for it. From a Canadian investor's perspective, since about 75 percent of the products are manufactured in the United States, with about half being exported to Canada, the rise of the Canadian dollar is less important. The firm is also entering some new markets where it has zero market share and feels its products will garner sales.

The company has been around for a long time, with a good reputation — that bodes well. And given the beleaguered stock price, it would not surprise us to see another enterprise make a takeover offer at a reasonable premium to the current price.

While certainly still risky, it appears that ITP has faced jeopardy and recovered somewhat, although the stock market has not appreciated this as the share price languishes near the bottom of its historical trading range. This is something that delights us: buying into a company with reduced danger while the reward potential has increased dramatically.

Our target price for Intertape is $15.24. While this seems like an exponential gyration from the current level, the stock traded above this plateau in every year prior to 2005. It is one of only six Canadian companies that we would buy for the Contra the Heard portfolio today.


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