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Corsair Capital Management Owns 5.6% of Wausau Paper Corp. (WPP)

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A 13G filed with the SEC has reported that Corsair Capital Management, which is managed by Jay Petschek and Steven Major, owns 2.8 million shares of $530 million market cap paper products company Wausau Paper Corp. (NYSE:WPP). While the market capitalization is below $1 billion, on average about 240,000 shares are traded daily and with a current stock price over $10.50 there is over $2 million in daily dollar volume. We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), and so we can see that at the beginning of January Corsair had only owned about 140,000 shares of Wausau Paper Corp. (NYSE:WPP). See more of Corsair’s stock picks.

Specifically, Wausau Paper Corp. (NYSE:WPP) operates in two business segments. Its consumer products business produces tissue paper and paper towels; the company also has a specialty papers business. Total revenue was about flat last year compared to 2011, and overall has barely grown at all in the past few years; in fact, sales were lower in 2012 than they were in 2008. The company was barely profitable when a number of special charges are included; even after these charges are added back, earnings do not look particularly high relative to the valuation. In addition, Wausau Paper Corp. (NYSE:WPP) continues to announce plant closures which will require special items for some time, though in the long run they should improve the profitability of the business at least relative to what it otherwise would have been.

Jeff Smith

Analyst consensus for 2014 implies a forward P/E of 21. That seems like an aggressive valuation, implying decent earnings growth in the several years following that time- assuming the company even hits analyst targets- while the top line seems stagnant. Jeffrey Smith’s Starboard Value reported a position of 7.3 million shares of Wausau Paper Corp. (NYSE:WPP) at the end of December; note that this gives the fund quite a large percentage stake (find Smith’s favorite stocks).

We can compare Wausau Paper Corp. (NYSE:WPP) to peers such as International Paper Company (NYSE:IP), Clearwater Paper Corp (NYSE:CLW), Domtar Corp (USA) (NYSE:UFS), and KapStone Paper and Packaging Corp. (NYSE:KS). All of these companies look to be in a better position in terms of profitability, though International Paper and KapStone both carry trailing P/Es of over 20. In the case of International Paper, the Street is expecting a rapid recovery: the stock is trading at only 10 times forward earnings estimates, with expectations for continued growth yielding a five-year PEG ratio of 0.4. We’d be quite wary of investing in the paper industry, but with revenue up 11% in the fourth quarter of 2012 versus a year earlier the company looks worthy of further research. KapStone is in a similar position, at least in the short term, as the forward P/E is also close to 10. That company has also been turning in good sales numbers, though it (as with all the other peers) is much smaller than International Paper in terms of market cap.

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