Ranpak Holdings Stock: Tough Road Ahead (NYSE:PACK)

Investment Thesis

Ranpak Holdings Corp. (NYSE:PACK) is a global product protection solutions provider headquartered in Concord Township, Ohio. My thesis is primarily based on PACK’s performance in the fourth quarter of FY2022 and its future growth prospects. I will also be assessing the company’s valuation at current price levels. I believe PACK is an overvalued stock with no significant upside potential, and I would recommend investors to not initiate any buying in the stock at current price levels.

Company Overview

PACK provides environmentally sustainable product protection solutions to e-commerce and industrial supply chain companies globally. The product protection solutions include void fill, wrapping, cushioning, and automation solutions. The company focuses on paper as the primary packaging solutions material. Paper packaging solutions account for 15% of the global protective packaging industry, and PACK has around 60% of the market share in the global paper packaging industry. PACK has clients in over 50 countries globally, the majority of them based in Europe and North America.

Q4 FY2022 Results

PACK recently reported weak fourth quarter FY22 results, failing to impress me on multiple parameters. PACK experienced a significant decline in gross as well as net profit margins. I believe the inflationary headwinds coupled with weak demand have severely affected the company’s financial performance in the fourth quarter. As a result, PACK missed the market EPS and revenue estimates by a significant 115% and 10%, respectively.

PACK reported fourth-quarter revenue of $79.4 million, a considerable decline of 27% compared to $109 million in the same quarter last year. As per the management, the primary reasons behind this decline were an overall slowdown in e-commerce purchasing due to the opening of physical stores post, Covid-19 restrictions, and a weak holiday season. However, I think the problem is not just the slowdown in the e-commerce space but also the inability of the PACK management to retain its existing customer base and an inadequate strategy for acquiring newer clients.

Additionally, the currency headwinds from the European and Asian revenues further impacted the revenues. The gross profit for the quarter experienced a massive fall of 43% to $22.3 million, compared to $40 million in the corresponding quarter last year. As per my analysis, a massive fall in the revenues and a comparatively lower decline in the cost of goods sold resulted in this increase. The gross profit margin for the quarter stood at 28% against the Q4 FY21 gross profit margin of 35.6%. The operating expenses for the quarter saw a decline of 26% to $27.9, compared to $37.8 in the same period last year. As per my analysis, a reduction in the selling and administrative expenses resulted in this fall. However, even after a significant reduction in operating expenses, the company reported a net operating loss of $5.6 million against an operational profit of $1.1 million in the same period last year. I believe this is a serious cause of concern for the company as I don’t see the expenses going down any further in the upcoming quarters, especially in this high inflationary environment. I expect the operating margins to remain stressed throughout FY23. PACK reported a net loss of $7.3 million, compared to a net loss of $2.5 million in Q4 FY21, representing a loss per share of $0.09.

Now, let us have a look at PACK’s balance sheet. As of 31st December 2022, the company reported cash and cash equivalents of $62.8 against long-term debt of $397 million. I believe this massive long-term debt is putting significant stress on the company’s balance sheet. High long-term debt could make further fundraising in the future really difficult, causing a leverage issue for the firm. Additionally, the interest expense caused by this debt is having a material impact on the company’s financial performance. In Q4 FY22 alone, PACK incurred interest expenses of $5.5 million. I believe the real trouble is only beginning for PACK in this high-interest environment with consistent interest hikes by the Fed. Their net leverage ratio currently stands at 5.3x, which is significantly higher than the standard leverage ratio of 3x. After assessing the balance sheet, I found multiple factors quite alarming, including low cash reserves and a massive debt obligation.

Overall, the fourth quarter result was quite disappointing, with declining profit margins and a stressed balance sheet. The management has provided optimistic FY23 guidance with revenues estimated to be $365-$385 million, representing a 6%-12% y-o-y revenue growth. The adjusted EBITDA is estimated to be in the range of $76-$86 million, representing a y-o-y increase of 14%-28%. I think that the company will face considerable difficulty in achieving these targets given the high inflationary environment that they are operating in and the weak growth trajectory that they are experiencing.

Quant Rating and Valuation

PACK has a Quant rating of Hold on Seeking Alpha. Talking about the factor grades, the company has a D+ factor grade in valuation, growth, and profitability, respectively. I believe these grades perfectly define the company’s current position and reflect that they are significantly overvalued with a very poor growth trajectory and widening losses. PACK has a D grade for momentum, which indicates its poor performance with respect to the price action in the past few months. The company has an A grade in revisions, but there is no point in revising targets and missing them, and that is what’s happening with PACK. Wall Street has a buy rating for PACK; however, I think this rating could see a downgrade in the coming months, given the company’s poor financial performance.

PACK is trading at a share price of $5.17, a YTD decline of 12%. It has a market cap of $425 million. PACK is a loss-making enterprise, and hence I am using its estimated sales to assess its valuation. It is currently trading at a forward EV/Sales multiple of 2.16x against the industry standard of 1.47x, which clearly shows that it is significantly overvalued with respect to its estimated sales growth. Additionally, PACK is trading at a Net Debt/ adjusted EBITDA multiple of 5.3x, which I believe should not be higher than 3x in the case of PACK. This clearly reflects that PACK is financially and fundamentally overvalued, and I recommend that investors not invest in the stock at the current price levels.

Conclusion

PACK has a tough road ahead with declining revenues and deteriorating profit margins. The high inflationary environment, coupled with weak demand, is causing serious troubles for the company. A high long-term debt liability is putting a lot of stress on its balance sheet. The consistently increasing interest expense in this high-interest rate market is putting a dent in the company’s profit margins. Considering all these factors, I would recommend investors to stay away from this stock, and hence I assign a sell rating for PACK.