Thursday, June 18, 2009

The Money Fortress

Fortress Paper (FTP) is not your average paper company. While many paper companies struggle with volatile pricing (thanks to the fact that paper is generally a commodity product), shrinking demand, and industry overcapacity, Fortress Paper has been printing money - literally.

The company supplies high-end security paper to central banks for the purposes of supplying currency. As central banks attempt to stimulate their economies by printing currency, Fortress Paper has benefitted, as its security-paper segment operates at full capacity.

Despite the strong outlook, the company trades with a P/E of just 6 and a P/B under 1. The company has managed to stay profitable throughout the economic downturn, and does so with a current cash balance of $19 million (compared to its $70 million market cap).

Growth mongers will love the fact that the company is considering tripling its capacity for security-paper, but value investors may see this as a reason to proceed with caution. An increase in capital expenditures of this magnitude is always a risk: large sums of cash are diverted away from shareholders in exchange for uncertain returns.

While the company does generate good returns on equity, it has a short record as a public company, having IPO'd in 2006. For those who believe strongly in its growth story, this represents a terrific buying opportunity. For those of us who would rather see a stronger track record along with a less uncertain future, Fortress Paper certainly qualifies as worthy of keeping an eye on.

Disclosure: None


Anonymous said...

Are banks seriously still printing money in the traditional sense?! I would have figured that, with the increasing use of electronic banking, the need for central banks to actually print paper currency in order to stimulate economies would have declined.

Do you think the growth of e-banking will pose a serious threat to Fortress' security-paper products in the long term?

Saj Karsan said...

Interesting question! I would agree that the percentage of currency that needs to be printed is likely declining on a long-term basis. However, supplies of currency required will continue to increase as long as economies continue to grow.

Furthermore, central banks are willing to pay more per unit of printed currency as innovative efforts to defeat counterfeits are implemented. For example, Fortress is now implementing a method of assembling currency paper by combining 3 sheets of 2 materials into one combined security paper.

Who knows what the future holds; perhaps in 30 years there will be no more paper currency in Western countries. Luckily investors don't need to wait that long, and need only wait until the next asset boom to cash out ;)