KapStone stock not run-of-the-mill

KapStone's North Charleston paper mill has been a key part of the local economy since 1937. The company bought the Cooper River operation on July 1, 2008. Shares of KapStone closed at a record $38.09 Friday.

Leroy Burnell

As one of the Charleston area's biggest employers, publicly traded KapStone Paper and Packaging Corp. is certainly a stock of local interest.

The interest intensified last week.

Shares of the papermaker and North Charleston mill owner shot up Monday after it announced it is buying Longview Fibre Paper and Packaging Inc. in an all-cash deal valued at $1.03 billion.

Shares of the Big Board-listed “KS” jumped $5.40, or 18 percent, to close at $35.12, after peaking at $35.76 earlier in the day.

Like KapStone, Washington-based Longview makes containerboard and corrugated containers, as well as specialty papers. mostly at mills spread over a few Western states.

“Acquiring Longview is an outstanding opportunity for numerous reasons,” said CEO Roger Stone, a paper industry veteran who's the “Stone” in KapStone. “The acquisition immediately adds value for our shareholders by increasing earnings and generating very strong free cash flow. The deal is accretive to our bottom line from Day 1. Our balance sheet, which was strong going into this transaction, remains strong after the acquisition.”

Northbrook, Ill.-based KapStone has come a long way since going public and netting $113 million as an upstart with no operations in the summer of 2005. For $6, investors received one share of the new business and the rights to buy two more at $5 a pop by Aug. 15, 2009.

In essence, KapStone was offering 300 shares for $1,000.

Under that buy-in scenario, anyone who risked a flat grand and held on saw that modest grubstake climb to more than $11,400 as of Friday.

Not bad. But investors who jumped in when the stock hit bottom — $1.05 in early 2009 — did even better. A timely $1,000 investment at that all-time-low point would have soared in value to more than $36,000 at the end of last week.

The run-up comes just a couple of weeks ahead of the fifth anniversary of KapStone's $471 million purchase of MeadWestvaco Corp.'s local paper and wood chip businesses.

That sale included what is now one of the company's flagship moneymakers: the familiar 76-year-old mill on the Cooper River, where KapStone is shelling out $29 million to upgrade a key piece of machinery.

Whether the stock can continue on its trajectory after the Longview acquisition is debatable, though the early reaction has been bearish.

Deutsche Bank downgraded the shares Wednesday to a “hold” rating from a buy recommendation.

Separately, an investment professional analyzing KapStone's stock on Seeking Alpha, a financial website, also is on the sidelines.

“After shares have more than doubled over the past year, and shareholders have fully priced in the benefits from the announced deal with Longview, there is not much upside potential left,” says the unidentified author.

Perhaps, but the climb out of the abyss three years ago has been impressive. On paper, at least.

Reach John McDermott at 937-5572.