Tredegar Corporation (TG): This Stock Has Huge Upside Potential

Tredegar Corporation (NYSE:TG) has experienced a lot of volatility in the past two and a half years. Its stock price had dropped significantly from $26.30 per share in February 2012 to around $13.50 per share in June 2012. Afterwards, it advanced significantly to more than $30 per share in April 2013 before it fell to $25.60 per share at the time of writing. Mario Gabelli, in the recent Barron’s Roundtable, expressed that this company could be an acquisition target. Is Tredegar Corporation (NYSE:TG) a good buy? Let’s find out.

Conservative capital structure and a reasonable valuation

Tredegar Corporation (NYSE:TG) operates in two main business segments: Film Products and Aluminum Extrusions. Most of its revenue, $611.9 million, or 71.4% of the total revenue, was generated from the Film Products segment while the Aluminum Extrusions segment contributed $245.5 million in 2012 revenue. The Film Products segment had a much higher operating margin of 11.4% while the Aluminum Extrusions segment’s operating margin was only 3.7%. The biggest customer of Tredegar Corporation (NYSE:TG) is The Procter & Gamble Company (NYSE:PG), accounting for around $264 million in 2012 sales. The company reported that P&G and Tredegar have enjoyed a good long-term relationship based on product innovation, process improvement, and cooperation.

What I like about Tredegar is its conservative capital structure. As of March 2013, it had nearly $380 million in equity, $38 million in cash, and only $118 million in debt. Thus, the net debt stayed at only $80 million. Looking forward, Mario Gabelli expects that its revenue could reach more than $1 billion in 2014 while EBITDA might grow from $103 million to $132 million in 2015.

Tredegar Corporation (NYSE:TG) might earn $1.40 per share in 2013 and $2.00 in 2015. The market values Tredegar at nearly 8.2 times its EV/EBITDA. EV/EBITDA stands for Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization. This valuation ratio reflects the relationship between the market value, adjusted with cash and debt of the company, and its cash flow position.

Highest dividend yield but high payout ratio

Compared to peers AEP Industries (NASDAQ:AEPI) and , Tredegar Corporation (NYSE:TG) has a bit higher valuation. AEP, at $66.20 per share, is worth more than $366.4 million on the market. The market values AEP the cheapest at only 7.5 times its EV/EBITDA. Recently, AEP Industries (NASDAQ:AEPI)’s share price dropped significantly, from around $83 per share to only $66.20 per share after the company released disappointing quarterly results and outlook.

Looking forward, the company estimates that the business volume might stay flat in 2013, lower than the previous forecast of 3% growth. As the company had experienced extremely significant gains in the period of January 2012-May 2013, I personally think that the market might keep pushing AEP lower in the near future.