Founded in 1909, Ennis is a producer of wholesale commercial customized paper products and packaging for healthcare organizations, banks, and food and beverage companies. Ennis headquarters are in Midlothian, TX, and CEO Keith Walters has been in place since 1997. He built out the rest of his team through the early 2000s, and since then, the company has grown its market cap at a 4% CAGR to $400 million, while holding zero debt and building its cash balance to $68mm. EBF has also grown its dividend annually under this team, and the company sports a 5% yield. The team has also overseen 33 acquisitions, building EBF to its now 40 brands. Today, 2,500 employees operate 61 manufacturing facilities totaling 4mm square feet across 21 states, with EBF owning approximately two-thirds of that amount and leasing the rest.

In April 2016, the company announced it would sell off its non-core apparel division to focus on the print business. In retrospect, this was a shrewd move, as Ennis has added ~250 basis points to average annual EBITDA margin to 14.5%, despite shrinking the company by nearly $200mm in revenue to ~$350mm in 2017. Management has done a good job continuing to gain ground in the core print strategy, however, making four acquisitions since 2018 totaling $65mm in enterprise value and diversifying the product suite, while growing revenue to $438mm in 2020 – up 23% from the 2017 trough.

The company has no customer concentrations, and a consistent backlog of $20mm in revenue (down to $18mm for COVID). This is somewhat limited visibility into future revenue streams (only about 2 weeks), but its consistency, the good size of the business, the longstanding dividend, and the lack of customer concentrations indicate to us here at Inverness that Ennis knows how to manage its customer base well.

Ennis management believes EBF is the largest provider of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders to independent distributors in the United States. Management also notes that the coronavirus pandemic has not affected the business materially. Rather, the greater threat is the known steady decline of paper products, overtaken in everyday business use by email and other computerized forms of internal communication.

Financials and Valuation

Operationally, EBF has seen revenue grow at an average rate of 3-4% since 2017, and Inverness likes the aforementioned strong EBITDA margins. Inverness’s liquidation valuation work validates the company’s strong balance sheet, with net liquidation value of ~$60mm utilizing some conservative advance rates, which pairs well with the company’s lack of debt. EBITDA of $55-60mm over the past three years reflects a larger business, and in a private market scenario would see a higher likelihood of covenant lite deals with creditors, so the company has good access to capital if it should seek to grow or if it ever gets into a financial crunch.

Ennis’s enterprise value is approximately $400mm, or 6.7x 2020 EBITDA, reflecting a somewhat cheap business on its own. However, when compared to printing peers like RR Donnelly, with its EV of 4.0x, for example, a value investor must do some soul-searching for conviction. RRD’s revenue base was $6.3bn in 2019 and EBITDA was ~$400mm – much larger than EBF, of course. However, with RRD’s 6% EBITDA margin, EBF manages its business much more efficiently, resulting in a much clearer and therefore stronger focus on its core products. RRD’s own market cap is $100mm, owed in part to a debt burden of $1.7bn and leverage of 4.25x, and the lower EBITDA margin reflects a narrower margin for error. Should RRD reduce that debt burden and become more nimble, EBF would need to watch out, but with EBF’s current focus on its own competitive edge and strong dividend and balance sheet, Inverness would select EBF as the healthier prospect of the two, despite the higher relative price.

Overall, Inverness has a favorable buy opinion of EBF. Even with its strong market position, the company looks to be little-known, with approximately 700-800 shareholders annually dating back to 2016, while holding a long-term position in a tough market and making healthy EBITDA margins with no debt. In the face of the technological weakness of its industry, management seems to have been dealing well with its inherent computerized competitive threat by broadly diversifying its brands for its commercial clients. These customers will continue to need custom packaging for everyday operations, and so EBF’s value proposition has good protection while this management team continues its course. And the 5% dividend is the cherry on top.

Inverness Holdings reserves the right to and may enter into positions in EBF periodically. Inverness likes to trade this one, buying at or below $16, selling when it floats above $17. EBF’s volatility is comfortably predictable in that regard, having traded between $15 and $22 over the past five years. If you buy a little too high, well, at least it’s still a good company. And you get the dividend.

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