In the investing dogfight, Nashua is a calm, profitable haven

Benj Gallander and Ben Stadelmann
Thursday, October 25, 2007

Thank goodness the main-stage event involving Michael Vick is behind us. Surely you know about this, as it was front-page news way beyond the sports section and was even yakked on The View: Vick, a supremely talented quarterback for the Atlanta Falcons of the National Football League, was accused of bankrolling a dog-fighting ring. A number of canines appear to have died during the action, while others were put to their death. Vick could go to prison for up to five years, although prosecutors have indicated they will recommend a sentence of 12 to 18 months.

This event cast a pall over the lucrative NFL season. Fortunately, once the games were up and running and men returned to beating the crap out of each other, Vick was shuttled to the figurative sidelines. The NFL also suspended him. We can only presume that it was because he was engaged in an illegal activity, not because of the violent nature of this sport. Given the paralysis, bone-breaking injuries and even early deaths that the NFL dishes out, that would be too ironic, even for our bloodlines.

All this “excitement” made us search for calmer, more humdrum fields of endeavour, and one was found in our very own portfolio. Of the stocks we held when we began writing this column, only two remain: High Liner, which we have covered here before, and Nashua Corporation, which somehow, has never appeared in this space in all that time.

The reason is probably that, as far as companies go, this one rates high on the mundane scale. Just how boring is it? Well, on the Yahoo! Message Board, the last posting about it was made in early July. Who could know that so many people could be so silent on a corporation with annual revenues north of $265 million?

Nashua was born in 1904 as the Nashua Card, Gummed, and Coated Paper Company, and it manufactures labels and specialty papers in the United States. Most years, it makes a bit of money, although there has been the odd slippage into the red. Under the stewardship of the previous CEO, Andrew Albert, the outfit was lacklustre beyond stodgy. Lately though, with new CEO Thomas Brooker at the helm, a major shakeup, at least by Nashua standards, is underway.

One of Brooker’s first actions was to sell the marginal toner and developer business. Real estate in New Hampshire also bit the dust for $9 million. These moves helped pretty up the balance sheet, so the firm offered to purchase up to 1.9 million shares of its stock for $10.50. Some investors found this to be worthwhile, but only to the tune of 750,000 shares. That knocked the shares outstanding to about 5.5 million. However, insiders still appear to believe the price is a bargain, as a number have ponied up their own money to buy shares at between $10.55 to $12 recently. Mr. Brooker himself paid $31,200 in September for 2,600 shares at $12.

The bottom line supports their confidence. While revenues only increased slightly to $67.7 million in the second quarter of 2007 from $65.5 million in 2006, the enterprise swung from a loss of $1.0 million to a profit of $1.3 million. EBITDA jumped to $3.3 million from $0.2 million.

Purchased for the Contra portfolio in 1999 for $6.63, the ten-year price record at that point in time saw this stock spend many years above the $25 level and broach the $30 mark. We set our target price at a conservative $15.31, but given that this was almost a decade ago, it would not surprise us if this mark is downright old school and the stock will climb back to old levels.

In each of the past 15 years, at least one company in the Contra the Heard portfolio has been taken over. This is quite a record, given that normally only 15 to 25 positions are held. Though there are no pursuers that we know of, Nashua could be had by a larger organization for a relative song. If they offer $15, a nice premium from the current value of $11.65, they could swallow up this firm for about $82 million. That would be pocket change for an Avery Dennison or our old portfolio mate R.R. Donnelley.

For those people who find that making money in relatively tame companies like Nashua isn’t exhilarating enough, it might be worthwhile noting that the only two states where dogfighting is not a felony are Idaho and Wyoming. Certainly, if you want to participate in this activity, it is better to go where the penalties are less onerous. Another option, of course, is to spend the whole weekend watching men beat each other up on the gridiron. Of course, this panacea for some represents a prison for many.