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Is Mercer International a Bargain?

- By Alberto Abaterusso

Investors may want to consider Mercer International Inc. (MERC), a Canadian producer and seller of northern bleached softwood kraft pulp, as they review their portfolios.

Analysts are predicting the company's net earnings will grow an average of 5.86% per year over the next five years. Mercer closed fiscal 2017 with adjusted diluted earnings of $1.08 per share, which reflected 100.8% growth from the previous year.

Total revenue, which came in at $1.17 billion in 2017, up 25.5% from 2016, is forecasted to increase 24% to $1.45 billion in 2018 and 35% to $1.96 billion in 2019.

In addition to selling pulp to other companies that produce tissue, specialty papers, printing and writing paper, Mercer International sells lumber and wood residuals to secondary manufacturers, distributors, building companies, retail yards and home improvement centers.

The pulp segment is contributing 85% to total revenue and the wood products segment contributes the remaining 15%.

The company has paid dividends since 1997. The most recent quarterly distribution of 12.5 cents per ordinary share was declared on Oct. 25. Mercer International will pay the dividend on Dec. 20 to shareholders of record as of Dec. 13. The ex-dividend date is scheduled for Dec. 12. The quarterly distribution leads to a forward dividend yield of 4.27% according to the closing share price of $11.7 on Wednesday. If we consider the industry has a median of 2.45% and the S&P 500 index has a dividend yield of 1.97%, the company's forward dividend yield is another reason to invest in the stock.

The average target price of $27.25 per share, reflecting a nearly 133% upside over the next 52 weeks, adds to the investment thesis.

The company is supporting the annual dividend of 50 cents per share with approximately $242.2 million in cash on hand and equivalents. This means the total liquidity available alone is sufficient to finance the dividend payment for more than seven years.

The business is generating an operating cash flow of about $212 million annually, of which almost 40% is allocated to capital growth and dividend payments.

The total debt-to-equity is high at 129%, well above the industry median of 60%, but the interest coverage ratio stands at 4.84, signaling Mercer International may struggle to cover the heavy financial burden. As long as investments can generate a higher return of 16.5% than what they are costing, 8.5%, the amount of debt outstanding is not a problem.

GuruFocus has assigned a financial strength rating of 5 out of 10.

The share price decreased 12% to below the 50-, 100- and 200-day simple moving average lines.

The price-book ratio is 1.3 versus an industry median of 1.33, the price-sales ratio is 0.58 versus an industry median of 0.87 and the price-earnings ratio is 6.07 compared to an industry median of 15.82.

The 14-day Relative Strength Indicator is 35, suggesting the stock is close to oversold levels.

The Peter Lynch chart suggests the stock is cheap.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.