Verso Corporation: Responding To The Downturn In Style (NYSE:VRS)

Verso Corporation (VRS) came across a screen we ran where the objective was to find stocks with compelling valuations, low debt and a paying dividend. The other prerequisites of the screen were to ensure the respective companies were profitable and had plenty of liquidity (high current ratio). Verso satisfied all of the parameters, as we can see below, and definitely warranted more research after this step. Since we like investing in low-priced stocks (usually under $20 in case we write options against our positions), the screen also only gave results for stocks under $20.

Price-to-earnings ratio

1.54

Price-to-book ratio

0.28

Price-to-sales ratio

0.14

Price-to-cash/flow ratio

6.7

Debt-to-equity ratio

0

Dividend

4.94%

Price of shares

$8.09 per share

What stood out from the screen immediately was how cheap Verso’s earnings, sales and assets are at present. Furthermore, the stated dividend yield of just under 5% does not include the special cash dividend of $3 per share which was declared recently. Suffice it to say, there is a lot to like here from the outset.

We know, though, that cheap “value”-type companies are cheap for a reason, and the technicals back this premise up. As the long-term weekly technical chart shows, shares have been making lower highs for approximately two years now, which is worrying. The $8 level though has acted as strong support on multiple occasions, which is encouraging from a bullish standpoint. The probable pattern looks like a descending triangle (bearish), but we have bullish signals (divergences) on both the RSI indicator as well as the MACD indicator. Whichever way the technicals turn out, it is crucial that Verso shares stay above support in the near term to make sure that potential descending triangle does not gain any traction.

Considering the fact that Verso has no interest-bearing debt since Q3 of last year, and that the net-worth of the company is almost 4 times the present market cap, the risk of bankruptcy here is practically zero. Could we fall some more in price? Of course, but look at how the firm’s profitability metrics have been trending. Despite the fact that earnings will most likely drop by $1.80+ per share this year and sales by $1+ billion, Verso’s return on equity still surpasses 20% over a trailing 12-month average. Its trailing return on assets metric (ROA) of close to 12% looks even more attractive when compared to the averages in this sector.

Therefore, the company at present satisfies 3 major conditions of being a viable value play:

  1. Verso has elevated returns on capital, which is enabling the firm to remain profitable in this difficult environment. The second quarter of this year is expected to be the only quarter (-$0.99 EPS) which reports negative earnings. Trends like this speak volumes about the firm’s ability to generate profits in what has been a very difficult environment for the sector in general.
  2. The recent announced $3 special cash dividend speaks volume about the integrity of Verso’s management with respect to its willingness to return cash to shareholders. Furthermore, up to the recent second-quarter conference call, management had repurchased over $22 million of shares, which also benefits the shareholder in the long run.
  3. As discussed above, the valuation looks compelling. Suffice it to say, when buying any investment below the calculated intrinsic value, the odds are straightaway stacked in favour of the investor.

What we liked on the recent earnings call was management’s flexibility with respect to the operation of its mills. In the second quarter, for example, management decided to idle two mills in a move to cut costs in a totally different operating environment. Depending on market conditions, these mills can remain closed or start up once more to support the remaining two operating mills (Quinnesec and Escanaba).

Here, we see the advantages manufacturing companies have in certain sectors. Where retail has higher fixed costs and many times a much larger plant & equipment footprint, companies like Verso can pause operations to see how the sector fare in quarters to come. Again though, the reason why Verso can be so flexible is because of its strong financial position. In fact, plenty of upward capacity still exists at the two current operating mills. If demand returns slowly, we see the firm maximising capacity at these mills first before considering opening up the other mills (Duluth and Wisconsin). This approach should eventually please the market over time.

Therefore, to sum up, Verso definitely has all the hallmarks of a quality value play at present. Management looks honest, the valuation is compelling and the firm will still be healthily profitable in 2020. Let’s see what the third quarter brings.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VRS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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