Ennis: Growth Via Acquisitions Vs. Industry In Decline (EBF)

Ennis, Inc. (NYSE:EBF) is a company that produces and sells business forms and products in the U.S. market. It competes in a market that is experiencing a long-term secular decline and has as its primary growth mechanism the acquisition of its peers.

While the company is well run and performs well, it has continued to struggle on the growth side of its business as evidenced by the price movement of the stock over the last five years or so, where several times it has hit a price ceiling of approximately $22.00 per share, before pulling back.

It recently broke through that average, reaching a 5-year high of $23.44 before pulling back under the $23.00 mark.

That is starting to look too pricey to me based upon its long-term performance and strategy of growth via acquisitions even as the physical business form sector continues to decline.

In this article I want to take a look at some of the recent numbers, what they suggest for the near and long term, and what the company should be doing to offset the consistent decline in the paper form sector.

Some recent numbers

Revenue in the second fiscal quarter ended August 31, 2022, was $111.2 million, up from the $100.5 million in the second fiscal quarter of 2021, up 10.7 million or 10.5 percent.

Gross profit margin in the reporting period improved to $35.2 million, or 31.7 percent, an increase from the gross profit margin of $28.9 million, or 28.8 percent last year in the same quarter. Net earnings in the quarter were $12.2 million, or $0.47 per share, significantly up from the $7.5 million, or $0.29 per share year-over-year.

EBITDA increased sequentially from $20.5 million to $21.3 million, accounting for 19.1 percent of sales for the first and second quarters.

The company held cash and cash equivalents of $92 million at the end of the quarter, up from the $85.6 million held at the end of February 2022. The company has no debt.

How to view Ennis

When considering a market leader in a declining industry, there are several things to take into account if thinking of taking a position in the company.

For example, EBF has made the decision to primarily grow via acquisitions because there’s not a lot of room for organic growth outside of occasional pricing power that it has under certain conditions, such as recent paper and supply chain shortages where demand supported raising prices on some of its products.

On the other hand, for some reason EBF has decided to forego taking positions in digital competitors, leading one to wonder how long it’ll take before that backfires on the company. I think it still has room to run, but when it eventually hits the ceiling of demand for paper forms, there will be nowhere to go but down, and acquisitions won’t be able to make up for lower demand.

It looks like that is a way off, but it’s coming, and the question of what the company will do at that time remains to be answered.

There will always be some demand for paper products, but it’s going to continue to shrink, and buying up peers that offer paper forms and associated products rather than taking positions in digital competitors is a puzzling, long-term strategy, but makes sense in the near term.

What might be going on there is management may think, and possibly correctly, that there is still plenty of time before it faces the point of no return, so is foregoing grabbing a significant piece of the digital pie.

That said, the current economic conditions lend themselves to getting some quality assets for cheap. So, it appears EBF is content with implementing its current strategy for the long haul.

What’s happening is the company is buying up competitors even as the physical business form sector continues to contract. Basically, what it’s doing is trying to outrun the decline by increasing the number of assets it holds.

That has been working in the near term, but as mentioned earlier, there comes a time when it can no longer do so. How long that takes will determine the performance of EBF over time.

Apparently, management believes, by its actions, that this is going to take longer than some industry watchers think and continue to implement and execute on the same strategy it has been for some time. As for now, I don’t think the company will have any issues with continuing to pay its dividend, which is $1.00 at this time, yielding 4.37 percent.

Even so, it is trading at a high price at this time, based upon nothing I’ve seen that warrants it, so for those thinking of taking a position in the company, it would probably be best to wait for a pullback to give room for its share price to grow, as well as provide a better yield.

Conclusion

Ennis is a well-run company that appears to have the ability to continue to grow via acquisitions in the near term, even as the industry it competes in continues to shrink.

Because of it not being willing to take positions in its digital competitors, it will eventually hit a ceiling that it is unlikely to be able to break through in the future, no matter how many companies it continues to buy. That time isn’t here yet, but it will eventually come.

With its share price coming off a recent 5-year high, it hasn’t pulled back enough in my view to justify taking a position in the stock. There aren’t enough catalysts that point to a sustainable increase in its share price.

I think EBF will continue to trade rangebound for a long period of time, even if the range moves slightly up because of the impact of acquisitions on its top and bottom lines. But based upon the company’s current strategy and actions, there is little to suggest anything will change, until or unless it starts to invest in digital peers. If it does, I see a potential, incremental long-term growth trajectory. If not, it will probably continue to trade in a tight range while continuing to pay out a decent dividend until it ultimately hits the ceiling of its potential in the declining paper forms sector.