One Fundamentally Strong Small-Cap Stock to Punt On- SWM

Schweitzer-Mauduit International, Inc.

SWM Details

Schweitzer-Mauduit International, Inc. (NYSE: SWM) is a diversified paper and resin-based product manufacturer. It makes and sells paper and reconstituted tobacco goods and specialist paper products to the tobacco business. Advanced Materials and Structures (AMS) and Engineered Papers (EP) are the two segments in which the company operates.

Financial Highlights: Full Year 2021 Results (period ended on December 31, 2021)

• Solid topline growth: During the FY21, the company reported a strong revenue jump of ~34% driven by ~71% jump in the Advanced Materials & Structures (AMS) segment sales, and partially offset by 4% reduction in Engineered Papers segment sales.
• Improved Profitability: During the period under consideration, the company’s reported net income stood at USD 88.9 million improved from USD 83.8 million reported a year before, implies a growth of 6.1% on a YoY basis. This was largely driven by solid growth reported in net sales and partially offset by 41.3% jump in manufacturing expenses on a YoY basis.
• Adequate Liquidity Profile: The company has decent liquidity position, with current ratio of 2.57x at the end of FY21, improved from 2.38x at the end of FY20. And Quick ratio has also improved from 1.30x at the end of the FY20 to 1.45x at the end of the FY21.

(Source: Company Website)

2022 Financial Outlook:

• Growth Outlook: In 2022, the company expects a robust profit recovery and has set full-year guidance with Adjusted EPS to be in the range of USD 3.50 to USD 3.95, driven by a 20% to 30% increase in adjusted EBITDA, accelerated by Scapa acquisition.

Key Risks:

• Product Risk & Customer Demands: Changes in Recon product sales or production quantities, pricing and manufacturing costs, cigarette paper, and new technologies like e-cigarettes are all factors that the company must consider. In addition, because of changing customer demands, there is competition and changes in AMS end-market items.
• High Leverage: SWM’s total debt was USD 1267.1 million as of December 31, 2021, about double what it was in FY20, increasing the company's leverage and resulting in hefty interest commitments, which is a bit problematic for the company.

Valuation Methodology: EV/SALES Multiple based Relative Valuation

(Source: Analysis by Kalkine Group)

Stock Recommendation:

The company reported robust performance in the financial year just gone by, with revenue up 34% and reported decent growth in bottom line performance despite significant jump in manufacturing costs on the back of the increased inflationary pressure on the raw materials prices. Moreover, company has provided positive guidance for the full-year FY23.

From the technical standpoint. SWM shares are hovering near a crucial demand zone as multiple times over the past the stock has bounced back near the current trading levels.

However, the company is also exposed to variety of risks ranging from increasing inflationary pressure which could impact margin profile of the company and a resurgence in COVID-19 cases could also impact the supply chain.

Hence, based on the above rationale and valuation done, we recommend a “Speculative Buy” rating at the closing price of USD 29.73 (as of March 24, 2022).

1 Year Technical Price Chart (as of March 24, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Summary Analysis

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario.