Why Veritiv Is Still A Buy (NYSE:VRTV)

Leadership means everything. After Veritiv (NYSE:VRTV) named Salvatore Abbate as Chief Executive Officer, his experience in enterprise strategy and category management paid off. Veritiv has so strong a product packaging business that it may systematically pass higher input prices to consumers. Profit margins rose sharply in the last few years and revenues will likely exceed consensus.

Since trading at $60.31 and returning nearly 127% since this article, is VRTV stock a buy from here for new investors? Current shareholders need not consider selling the stock unless prospects worsen. So far, Veritiv shows no signs of slowing down.

Strong Fourth Quarter and 2022 Guidance

Veritiv posted GAAP earnings per share of $3.67. Revenue grew by 13.4% Y/Y to $1.86 billion. Importantly, the packaging firm’s management team rewarded itself with less than half of 2020’s stock-based compensation. Compensation fell from $17.7 million in 2022 to $7.4 million. Now that markets are amid a correction, investors will punish technology firms that paid its CEO billions a year. Moreover, companies that were recently listed publicly or through a Special Purpose Acquisition Company or SPAC will underperform in the markets. Investors seeking safety at too discounted a price should look at Veritiv.

Veritiv commented that (on slide 7) inflationary market prices across its product portfolio continued. Fortunately, it passed the price increases to customers effectively. It gave its customers plenty of notice. This will result in continued demand strength despite supply constraints. CEO Sal Abbate said that he expects inflationary pressures will continue. This will have an impact on results for 2022 but not enough to hurt its outlook.

For 2022, the company expects revenue in the range of $210 – $250 million. It will earn a massive $13.50 to $16.25 a share. That would value VRTV stock at only 8.4 times 2022 earnings.

Opportunity

Veritiv’s revenue may potentially exceed expectations, driven primarily by volume growth in packaging and facility solutions. Since 2014, revenue from packaging rose from 55% to 70% last year.

Source: Q4/2021 Presentation

Furthermore, CEO Abbate expects volumes will exceed the overall market growth rates on volume. Print is a smaller proportion of sales but will similarly benefit from pricing growth. Still, Veritiv does not have as much inventory built this year as it did in 2021.

Shareholders should expect an even distributed EBITDA for the year. Historically, EBITDA grew at a faster pace in the second half of the year. For this year, the price increases in packaging will have an impact on the product mix. In addition, the company is forecasting an even quarterly EBITDA based on GDP expectations.

To expand margins, Veritiv introduced small shifts in its compensation plan. This shift accelerated at the beginning of 2021. For example, it included a growth-oriented component in its commission plan. This led to a stronger focus on specific sectors and in its services business. By offering incentives to its sales team based on margin and growth, investors will benefit. Stock markets will recognize Veritiv’s continued growth momentum and will bid shares higher.

Risks

Higher energy costs, through oil, are a potential risk. But the company factored the rate of inflation in its guidance for the year. Cybersecurity is another risk. Veritiv is mitigating that risk by protecting its infrastructure.

Fears of the “great resignation” are not hurting Veritiv. Veritiv has good labor retention rates. It is rewarding staff with wage increases that keep pace with the market rates. By staying competitive, shareholders do not need to worry about increasing staff training costs.

Stock Score

Veritiv’s valuation score fell as shares rose. Investors are paying a slight premium in return for stronger growth.

The company has strong growth momentum and an ability to pass prices to customers. Inflation rates could worsen, hurting Veritiv’s competitors. Fortunately, its customers are highly satisfied with the company. Veritiv mitigated much of the supply chain disruptions by leveraging its own extensive delivery fleet and warehouse network. Customers will willingly pay for the small price increase in return for its reliable product availability.

Your Takeaway

Investors may hedge against inflation by buying companies that have pricing power. Veritiv is also expanding its suite of packaging products and services. This will lead to a continued increase in EBITDA this year and next. Its continued investments will ensure the company’s packaging business grows faster than the market rate. This will increase its market share.