Market Performance

Markets bounced back significantly over the past week and shook off the (brief) concerns around inflation, etc.

Market Stats

The volatility index (VIX) has continued a downward trend with occasional flare ups.

Personal Income and Spending report indicated May 2021 wages and salaries were up 5.7% from October 2020 levels…

Since the pandemic began, wages dropped ~10% and have since recovered by more than 17%.

Savings have been persistently high with the savings rate continuing >10%. With a lifetime average of 9% — the US has been running at above average savings every month since March 2020. This compares to 5% or less during the 2000s and 6-8% during the 2010s.

Quick Value

Tredegar Corp ($TG)

Tredegar is a small-cap specialty chemical company. They operate 3 businesses:

• Aluminum Extrusions. Under the Bonnell name, they make treated and untreated aluminum extrusions (beams and other products) for the construction, automotive, and specialty markets.

• Surface Protection. This segment makes films and overwrap films for various products and industries — example would be an overwrap film for bathroom tissue and paper towels.

• Flexible Packaging Films. Known as Terphane, this segment makes films mainly for packaged foods and industrial applications.

Aluminum has historically been more than 60% of total sales.

Quick recap of the past year…

Management laid out the highlights of the past year during the annual meeting.

• Sold Personal Care business for $46m

• Paid $6 per share special dividend

• Generated $1.51 in EPS and $96m EBITDA

• Significant customer attrition at Surface Protection

Five year financial summary…

This business has had flattish revenue over the past 5 years with spotty, but mostly positive, cash flow. Only recently has Tredegar started to generate consistent FCF, averaging $54m from 2017-2020.

Valuation…

• At $13.90 per share and 34m shares outstanding, Tredegar is a $470m market cap. With net debt of $122m, it’s an enterprise value of $592m.

• Average FCF has been $54m so roughly 9x P/FCF.

• By my estimate, trailing EBITDA as of 1Q21 looks like ~$85m for an EV/EBITDA multiple of 7x with 1.4x leverage.

The Surface Protection and Packaging Films segments have qualities of other specialty chemical companies — good growth and 20-30% or better EBITDA margins. Surface Protection lost a major customer which will likely cut EBITDA by close to half while Films saw EBITDA grow >40% in 1Q21. The Aluminum business looks like more of a commodity business with fluctuating revenue/earnings and closer to 10% margins.

Quick take…

By the looks of it, Tredegar has some nice specialty businesses (despite the customer headwind in 2021) — these businesses typically command a premium multiple.

Despite that, there is still some underlying cyclicality to the entire company. It’s pretty obvious when looking at revenue and cash flow volatility over the past 5-6 years.

They are coming off the heels of a large special dividend paid via debt financing. Free cash flow has gone toward repaying debt and paying for a modest dividend (current yield is 3%) over the years. It’s hard to know what direction they’ll take as they don’t hold investor calls and the company is controlled by the Gottwald family (insiders).