Jan 18, 2014 at 06:37 o\clock

The Annaly Knife May Have Stopped Falling

by: andhyxred   Keywords: Samsung, Holiday, Deals

  There is a popular saying that you should never catch a falling knife. Human nature is such that ones first instinct when dropping something is to quickly reach out to prevent it from hitting the ground and possibly breaking. Or in some cases, preventing the falling object from landing on your foot.Samsung Galaxy Nexus Mobile Store In the case of knives, the reason not to try to catch it are obvious, but too often we forget this rule when we are considering investing in a particular stock.Take Annaly Capital Management (NLY) for example. From an April high of about 15, the stock of the mortgage REIT has dropped over 30% and recently traded below 10. We know plenty of investors that tried to catch this falling knife at 12 on two separate occasions only to see the stock continue to fall. At a recent price of $10.10, we think it might be time to take a closer look and determine if it has truly hit bottom.(click to enlarge)Annaly Capital ManagementAnnaly is the largest mortgage REIT by market capitalization. It owns, manages, and finances real estate related investments, including a variety of securities, including: mortgages, mortgage pass-through certificates, collateralized mortgage obligations, agency debentures, and other securities. If you are wondering where the funds came from for your recent mortgage, there is a good chance it came from a company like Annaly.Annaly, like other mortgage REITs, make money by purchasing mortgages in the secondary market and collecting the principal and interest payments from these mortgages. They finance these purchases through short-term borrowing and can be in a variety of forms, such as swaps, repurchase agreements, (often referred to as repos), or swaptions. For simplification, we will simply refer to all of these financing sources as short-term borrowing.Typically, if the interest rate on the mortgages purchased is greater than the interest rate on the loans, the mortgage REIT will earn a spread. But the mortgage REIT business model doesn't end there. Once the mortgages are purchased, they become assets on the balance sheet and are available as collateral for additional borrowing, which leads to additional purchases of mortgages, etc. It is not surprising for a mortgage REIT to be leveraged 10 times or more. A net margin of 1.5%, therefore, can be leveraged to provide a gross yield of 15% if leveraged 10 times. If you haven't noticed already, mortgage REITs pay a very high dividend, usually in the mid-teens.RisksUnfortunately, there is no such thing as a free lunch. Investing in mortgage REITs exposes investors to certain risks, which make mortgage REITs quite a bit more volatile than REITs operating in other sectors, such as Senior Housing Trust (SNH) or Ventas (VTR).DefaultsWe are probably at the end or near the end of the mortgage default debacle that has plagued the industry and our economy for several years. But even in the event that we experience another 2008-like year and borrowers either involuntary default, or as is often the case these days, decide not to pay their mortgage, all of the mortgage securities on the Annaly balance sheet are guaranteed by either Fannie Mae, Freddie Mac, or Ginnie Mae, government backed agencies created to provide resources for mortgage lending. That effectively makes these securities default-free with an implied rating of AA+ -- a couple of steps above their target of an S&P rating of A. So at least in the case of Annaly, this risk is somewhat mitigated.Interest Rate ChangesWhen interest rates rise, mortgage REITs are affected in two distinct ways. On the one hand, the value of the securities they hold, namely the mortgages, typically fall in value with interest rates rise. They have the same reaction as does the fixed income space in general. Secondly, depending on whether short rates or long rates are rising, the cost of borrowing can increase rapidly when short term rates rise. This has a negative effect on the spread between the interest received from the mortgages and the interest paid on the short-term loans. The mortgage REIT must either decrease the dividend or increase leverage to maintain the same dividend. Investors will not be pleased with the first option and the second option makes the investment even riskier.With the recent announcement by the FED that $10 billion in tapering will begin in January, there is at least a bit less uncertainty going forward. The mortgage REITs, including Annaly, can now plan accordingly.Prepayment RiskPrepayment risk is highest in an environment of decreasing dividends. We have just lived through such an environment, and there have been some clear winners and losers in the refinancing boom. But interest rates are quite possibly at all-time lows, and while there may still be some borrowers out there thinking about refinancing, the majority that qualified for refinancing, have already done so. In fact, prepayment rates for Annaly have dropped considerably each quarter. See chart.(click to enlarge)In the event that any of these risks cause the value of the securities it holds to decrease in value by a large enough amounts, Annaly would then have to sell some of these securities at the lower price in order to meet margin calls. This process can feed itself. As securities are sold to meet margin call, driving the prices down, the lower prices trigger additional margin calls, which leads to additional sales, and so on.Annaly Change in StrategyWe like Annaly for a couple of reasons. One, it has slowly migrated its portfolio from strictly residential mortgages to commercial real estate loans. These commercial real estate loans have a higher yield than mortgages with shorter duration and are less sensitive to an eventual FED tapering. Commercial real estate (CRE) loans make up only $1.3 billion of an $84 billion portfolio but management intends on growing this portfolio to $2 billion by year end and 25% of its equity over the longer term.(click to enlarge)We see this as a positive trend as commercial real estate offers better risk-adjusted returns than mortgages. A recent survey by the Federal Reserve shows strong demand for commercial real estate loans and Annaly has a war chest of cash available to deploy into the space. Our biggest concern with the strategy is that Annaly is new to the space and does not have either a real estate footprint or the institutional relationships that other commercial mortgage REITS enjoy. Regardless, we feel confident in Annaly's ability to shift its strategy and of all the other mortgage REITs, it certainly has the resources to be a formidable player.Why Invest NowWe are watching the stock price movement closely for a strong sign that the stock has hit bottom. Regardless, we are inching our way into positions even at these levels. We like the stock for a variety of reasons:1. Dividend yield - Annaly has reduced its dividend from $1.60 per share to an estimated $1.15 per share. This still implies a dividend yield of 11.6%.2. Net spread widened for the first time in a long time - As the chart below shows, net interest spread increased from $0.98 to $1.01, primarily due to an increase in the average yield on interest earning assets.(click to enlarge)3. Rates may rise slower and/or expectations are discounted - the rapid rise in rates over the Summer of 2013 is not likely to happen again. We expect rates to rise but at a more moderate pace, making portfolio adjustments easier to manage.4. Largest mREIT - Annaly is the largest mortgage REIT and one of the best managed. If any of the mREITs can navigate a difficult environment, our money is with Annaly.5. The shift into commercial real estate, while increasing execution risk, may open up an entire new investment universe for Annaly.6. Annaly's core earnings, which have been falling dramatically, may have finally stabilized at $0.28/per share for the quarter ending September 30th. Keep in mind that because Annaly does not have any depreciation or amortization, this would be the equivalent of funds from operations for most other REITs. If the $0.28 were annualized, Annaly can be thought to be trading at less than 9 times FFO. That seems to be a compelling entry point.Generally speaking, the mortgage REITs are more volatile and more sensitive to interest rate risk than most other REITs. But at this juncture in the economic environment, they may be worth consideration again.Disclosure: I am long NLY, SNH, VTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)  

Jan 18, 2014 at 06:34 o\clock

VYM: Betting On Price Appreciation

by: andhyxred   Keywords: Samsung, Galaxy, Mobile, Store

  The Vanguard High Dividend Yield ETF (VYM) is a great way to get diversified exposure to a range of high yield dividend stocks. Like much of the rest of the market, VYM has had a good year. The stock is up 24.3% year to date and has delivered another 3.5% of dividends based on the 12/31/2012 closing price of $49.Samsung Galaxy Mobile Store38. In contrast, the SPDR S&P 500 Trust ETF (SPY) is up 27.5% with another 2.4% from dividends. The question is whether or not VYM remains a good investment opportunity, and also, what additional analysis would be worth conducting prior to making an investment.At first glance, SPY looks like it has been the better investment in absolute terms. However, this is with the benefit of hindsight. Consider the following table:SPY vs. VYM TickerSPYVYMSPY/VYM Appreciation27.49%24.34%113% Dividends2.35%3.54%66% Total Return29.84%27.88%107% Risk Free Estimate1.76%1.76%100% Market Risk Return28.08%26.12%107% Beta1.00.8123%Source: Yahoo!Finance, author calculationsFirst, this analysis looks at the capital asset pricing model and considers the concept of beta as a measure of risk based on the historical return relationship between VYM and SPY. The second and third columns show the various values of SPY and VYM. SPY delivered a greater return, while VYM had more dividends. One can then take out the risk free rate estimate to get the return from market forces. Here SPY is about 2% higher than VYM. However, VYM has a substantially lower beta than SPY, suggesting that on a risk adjusted basis, VYM actually did better than SPY.What conclusions can we draw from the beta analysis?First, if you don't subscribe at all to CAPM, there is not much to draw from a CAPM based analysis. However, how could one reconcile these facts? Perhaps there is an expectation that VYM will decline or SPY will appreciate and bring the values more in line. This type of analysis is based on point in time figures while markets are dynamic and continuously changing. VYM might perhaps be overvalued right now. Alternatively, SPY could be undervalued right now.What else should we consider looking forward?The other interesting observation for VYM is that the dividend yield is very close to the 10 year treasury bond yield. The TTM dividend yield on VYM is 2.85% while the 10 year yield is at 2.89%. While there will most likely be some dividend appreciation, potentially 8-20% based on historical figures that would contribute another 0.2% to 0.6% return, most of the return above the risk free rate will come from price appreciation in the holdings of VYM.This trend has been emerging over the last couple years as seen in the graph below.(click to enlarge)Source: Yahoo!Finance, author calculationsThis graph shows the historical progression of the TTM dividend yield for VYM vs. the ten year treasury bond yield. The spread between the two is in green. The spread was negative prior to the financial collapse when stocks carried relatively higher valuations with relatively lower yields. The spread also went negative in 2009 as dividends were drastically cut and the ten year was still in decline.Looking forwardSo if the yield between VYM and the ten year bond is the same, one is really betting that VYM will deliver superior price appreciation. With interest rates trending upward, one would expect bonds to continue a slow decline, while a strengthening economy should provide uplift to VYM. However, this does shift to the question of whether VYM is fairly valued. VYM carries a P/E that is somewhat less than the broader market which is an appropriate position. VYM holdings typically pay out a higher portion of their earnings as dividends than the broader market. This leaves less cash available to reinvest in the business and drive growth. From this perspective, VYM still looks like a reasonable investment within the context of seeking broader market exposure. However, its future performance might not be as strong as its more recent performance.Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. I am long VYM and expect to add to that position in the near future.Disclosure: I am long VYM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)  

Jan 18, 2014 at 06:31 o\clock

Actavis Primed To Outperform Through 2014

by: andhyxred   Keywords: Samsung, Galaxy, Mobile, Store

  Actavis plc (ACT) ends an eventful 2013 having almost doubled in price from $85 to $166 at the time of writing. The main event of the year was the $8.5 billion buyout of Irish drug maker Warner Chilcott effectively creating the third largest specialty pharmaceutical firm in the United States. With the dust starting to settle on the deal the question for investors is whether Actavis can replicate the strong gains in 2014. Headed by CEO and Chairman Paul Bisaro, Actavis is a global pharmaceutical company that develops, manufactures and distributes generic, branded and over the counter products. They're responsible for over 750 products in more than 60 countries. The company counts over 30 manufacturing and distribution outlets worldwide and 20 research & development centers. A leader in women's health, Actavis seeks to develop and manufacture pharmaceuticals of the highest quality. (Click to enlarge) Source: Yahoo Finance Earnings Acceleration Excites Investors The exceptional rise in stock price during 2013 was underpinned by three quarters of earnings per share acceleration culminating in a strong third quarter showing of 55% on a sales increase of 57& year on year. Analysts estimate a fourth quarter increase in EPS to 89%. Longer term numbers have also impressed. Annual EPS has grown four consecutive years with the three year rate hovering around a 35% increase.Samsung Galaxy Mobile Store Margins remain solid at 19.6% with a well managed return on equity of 20.8%. Gross margins had increased to 51.5% from 47.2% the prior year with the Ortho-McNeil-Janssen contract for the generic version of Concerta being the key driver. Warner Chilcott Set To Deliver Investors remain buoyed by the Warner Chilcott deal as the company has dramatically reduced its reliance on generic drugs which were responsible for 75% of revenue the preceding year. Just as appealing is the expected increase in revenue from specialty brands which could contribute up to 25% of company wide sales in comparison to around 7% pre-Warner Chilcott. CEO Bisaro believes the company is well on track to complete the aggressive integration of Warner Chilcott which is expected to yield $400 million in tax savings and an additional $50 million in interest savings after the refinancing of long term notes. New Product Expected To Feed Into The Bottom Line During the third quarter Actavis released a generic version of Lidoderm which is a pain relief patch commonly used after a bout of shingles. The branded version sold by Endo Health Solutions (ENDP) provides annual revenues of around $1.2 billion. Actavis will be the only company with a generic solution so this is expected to boost generic drug sales substantially to a possible $300 million clip. Generic Lidoderm is an example of company capabilities and it's the CEO's intention to use free cash flow to reinvest into significant growth opportunities wherever he may find them. The business is strongly focused on women's health but that won't stop the business seeking out high yield propositions such as dermatological functions or new markets such as Southeast Asia or Russia. This includes further acquisitions if necessary. Competition Remains Stiff Perrigo Company Plc (PRGO) is another generic drug maker that is seeking to keep pace with Actavis as its own acquisition strategy maintains an aggressive pace. The recently completed buyout of Elan plc (ELN) is expected to result in cost and tax savings of up to $150 million and an additional 10 cents per share for Perrigo's non-GAAP EPS in 2014. The company has maintained its dealmaking appetite at a lower debt/equity ratio (83%) than Actavis. Whilst this latest deal promises to augment Perrigo's attractiveness to investors, there was a 4% increase in fund ownership during the last quarter, its recent performance has been lagging. The 3 year sales growth rate is sluggish at 14% compared to Actavis' 32% and last quarter's 20% increase in EPS was dwarfed by Actavis' 55%. High Debt Ratio Presents Higher Risks Actavis is currently running a Debt/Equity ratio of 163% which is a red flag for prudent investors. However, the level is unsurprising given the aggressive nature of Actavis' acquisition plans. As long as management maintains hitherto high levels of due diligence to ensure that purchases are immediately accretive, then the debt can be easily serviced and reduced by the company's cash generating capabilities. Fund Managers Continue To Support New Price Highs Further support to the increasing stock price can be found from large trend followers and fund managers. Trend followers like to see new price highs to confirm strength and underlying support from institutional investors. Third quarter statistics show that there was a 3% increase in fund ownership and the second quarter in a row that big investors have increased holdings. Management retains 1.3% ownership of stock which is within the parameters expected of a company of this size although a dip below 1% would be a negative signal for investors. (Click to enlarge) Source: Yahoo Finance Conclusion Actavis is primed for another year of growth after the successful integration of Warner Chilcott. The associated savings and earnings accretion should underpin continued investor appetite. With the bull market in stocks appearing to be confirmed again after the strong positive reaction to the Fed's confirmation they'll be tapering the bond buying program, the downside risk to price gains is reduced. However, concerns over leverage persist and it's incumbent upon management to ensure that the anticipated cash flow from acquisitions is invested well. Bottom line growth needs to be organic rather than dependent upon availability of credit for future purchases. With this risk contained Actavis promises to continue to exceed investor expectations throughout 2014.Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)  

Jan 18, 2014 at 06:29 o\clock

Austin Dillon to drive No. 3 car

by: andhyxred   Keywords: Samsung, Galaxy, Mobile, Store

  CONCORD, N.C. -- The late Dale Earnhardt's famed No. 3 will be back on track in the elite Sprint Cup Series next season with Austin Dillon using the number.The move has been long anticipated because car owner Richard Childress has allowed his grandson to use the No. 3 as he's moved through NASCAR's ranks.[+] EnlargeJared C. Tilton/Getty ImagesAustin Dillon was installed as full-time driver of the No. 3, a decision that Dale Earnhardt Sr. would have approved of, car owner Richard Childress said.'I know in my heart, today, as I sit here, Dale Earnhardt is smiling down,' Childress said at Wednesday's unveiling. 'He would want to see this 3. He didn't want it to ever go away. But I felt it was the thing to do right after Daytona, and I know today that he's accepting this highly. I knew him that well.'The number has not been used since Earnhardt's death in the 2001 season-opening Daytona 500. The car was rebranded to No.Samsung Galaxy Mobile Store 29 for Kevin Harvick following Earnhardt's fatal accident.But Dillon has been using it NASCAR national competition since 2009, when he made his Truck Series debut in the No. 3. He won the Truck championship in 2011 driving the No. 3 for Richard Childress Racing, and the Nationwide title this year in the same number.Childress kept the number out of the Cup Series, though, intent on hanging on to it for the right driver.'We held the number, I've been paying NASCAR for it throughout the years and Bill (France) Jr. told me 'You know, if we're ever challenged, we'll have to let someone have that 3,' ' Childress said. 'But we weren't, and I knew that the right opportunity would come. It would have to be an Earnhardt or one of the Childress family that we would put behind that.'Childress said he publicly floated the idea of allowing Dillon to use the No. 3 at the start of the year to get a fan response, and got 90 percent positive feedback the day after he mentioned the number.'That said to me it was time, and if Austin wanted to it was his choice,' Childress said.Dillon said he was ready, and it's the only number he's ever used in NASCAR.'My grandfather has done a great job of teaching me how to handle certain responses to things, and I think we're going to go forward with it,' Dillon said. 'I've heard a lot of good feedback from the fans, and every time I'm at an autograph session I've had someone ask what's going to happen. They are excited and we are, too, at RCR.'It's what our sport was built on -- family and history -- and a great opportunity for all of our sport to see this No. 3 back on the track.Samsung Galaxy Nexus Mobile Store'The No. 3 Chevrolet will be sponsored by Dow, Bass Pro, Realtree and General Mills. Neither of the two paint schemes unveiled Wednesday resembled the dominant black cars driven by Earnhardt, winner of seven Cup titles and a first ballot Hall of Famer.But Childress believed just having the No. 3 back in the series will help resurrect Earnhardt's legacy.'My hope is that Dale Earnhardt fans will be re-energized and say 'Hey, it gives me something to look at,' ' he said. 'We know we aren't going to please everyone. We know that. We are going to do our best to make them proud and I know Austin will. I think the new fans will learn a lot about the great Dale Earnhardt by watching this.'Gil Martin, who led Harvick to six berths in the Chase for the Sprint Cup championship, will be crew chief for Dillon.Childress said he's consulted with Dale Earnhardt Jr. and his sister, Kelley, every time he's moved the No. 3 to a different level on the track and the Earnhardt family has been supportive. Earnhardt Jr. declined to use the No. 3 following his father's death, but has raced the number in the Nationwide Series.'I would be worried if I didn't think he'd respect it or not understand the legacy, but he does. I know he does. He appreciates it,' Earnhardt Jr. said last week of Dillon using the No. 3.RCR will field a three-car Cup lineup next season with Dillon, Paul Menard and Ryan Newman.Ty Dillon will run a full Nationwide Series schedule, and Childress said Wednesday he's sold his Truck Series assets to Gallagher Motorsports.Copyright 2013 by The Associated Press  

Jan 18, 2014 at 06:26 o\clock

Neenah Paper: Luxury Card Stock Priced Like Copy Paper

by: andhyxred   Keywords: Samsung, Holiday, Deals

  Luxury is a presence, indefinable yet undeniable, that infuses a product with glamour, intrigue and desire. This subtle elegance captures the essence of the spirit and creates a sense of belonging and the promise of becoming. At Neenah Paper (NP), this is exactly the perception that management has envisioned for the products and services the company delivers, and management's execution of this philosophy has set the company apart from its competition by developing meaningful positions in profitable niche premium markets. Our innate understanding of Neenah Paper- from its increase in product expansion, accompanied by its overall positioning in these specialty niche markets, to its attractive financials and returns - is why we conclude that the company is being undervalued by the market.About Neenah PaperBased in Alpharetta, Ga, Neenah is a leader in premium image and performance-based products serving customers in over 70 countries.Samsung Galaxy Nexus Mobile Store The company conducts its business primarily through two segments: a specialty, technical products business and a premium fine papers business. The technical products business is a leading producer of transportation and other filter media, durable, saturated and coated substrates used in tape, label, abrasives, filtration, medical packaging, wall covering, and image transfer markets. In its fine paper business, Neenah produces premium writing, text, cover and specialty papers. These papers are typically used in annual reports, corporate identity packages, invitations, personal stationery, and high-end packaging for point of purchase advertising. In the last reported quarter, Neenah reported revenues of $ 214.1 million, up 4% year over year. The year-over-year increase was attributable to growth in Fine Paper, aided by additional volumes from acquired brands.Growth DriversThroughout the past year, Neenah Paper has continued to diversify its portfolio by supplementing organic growth with acquisitions and partnerships to deliver value and expand the company's participation in growing specialty markets. In January, the two main acquisitions that set a platform for growth were the purchasing of certain premium paper brands from the Southworth Company and Wausau Paper Corp.Samsung Galaxy Mobile Store Neenah noted in the company's annual report that as a result of purchasing the brands of paper from Southworth, it will now be widely sold and distributed to major retail customers such as Staples, Office Depot, Office Max and, more importantly, Walmart. Annual sales from the acquired brands are approximately $20 million and Neenah's past record of performance should indicate that this move will provide even more distribution and products within existing channels. Julie Schertell, President - Fine Paper, said on the acquisition of the Southworth brands,'As the market leader in premium papers, this is a natural extension of our Fine Paper business. The addition of Southworth's well-regarded brands allows us to expand our presence in the retail channel and fits with our strategy to grow in profitable niches that value image and performance.'On the same date, Neenah also purchased assets from the printing and color business, Wausau. The purchase of these brands not only solidified Neenah's market position in premium papers, it also provided leadership in 'Brights', a new niche category. Also, the deal, which includes its Astrobrights, Astroparche and Royal brands, accompanied by the brands acquired in the Southworth deal strengthens the company's line of image-driven products such as premium papers, labels and luxury packaging. We believe this is very significant because the global market for luxury packaging, premium labels and retail solutions is over $500 million and growing. Neenah's current share in this market is less than 7%, anchored by labels in North America. As seen in the chart below, Neenah's revenues in the United States has substantially outpaced its performance in Europe and given the solid direction the company is in, we assume that this trend will continue, thus enabling Neenah Paper to expand its market share in the fine paper business.(click to enlarge)In addition to the acquired brands already mentioned, Neenah launched an expanded collection of design and packaging papers that showcased the company's access to unique product solutions as a result of its distribution agreement with Italian premium paper manufacturer, Gruppo Cordenons. This supports our claim of potential growth, specifically in North America, because Neenah will be marketing and distributing Cordenons papers to the U.S. and Canada. Cordenons specializes in making exquisite papers. The papers are thick and heavy and are used by clients for business cards, greeting cards, covers, presentation folders, tags, invitations, social announcements and similar such purposes. The partnership is a win-win situation for both the companies as both these companies will be able to offer distributors premium business products, which will add value and drive its businesses.Neenah's Fine Paper division, into which these products will be incorporated, is the smaller of the company's two divisions, but is much more profitable. Consolidated net sales in the fine paper business for three months ending Sept. 30, 2013 increased $20.2 million or seven percent from the prior year period and for fiscal year 2012, fine paper business had net sales of approximately $373 million. That is up 36% from net sales of $275 million in 2011. This was due to a two percent increase in volume primarily due to incremental volume from the acquisition of the Wausau and Southworth brands and double-digit volume growth in luxury packaging and label shipments.Neenah Paper's other business operation includes developing technical products. This business represented 54% of the company's net sales this past fiscal year, compared to 46% for fine papers.While technical products sales rose on a constant currency basis in 2012 and 2013, US dollar sales of $407 million were down 3% from the prior year largely due to currency translation. Even so, Neenah improved operating margins and delivered record profits in 2012, and according to the company's latest 10-Q for the third quarter, net sales in technical product's business increased $5.7 million or six percent from the prior year due to favorable currency effects, increased volume and a more favorable product mix. In 2014, profits should benefit from an improved sales mix as demand for higher value products is expected to grow, and sales of products in specialty markets are also forecast to be stronger.High-performance filtration media for fuel, air, oil, cabin air, as well as filtration for other markets continue to be the focal point of growth for Neenah Paper's technical products division, and we see rising demand in new international markets as Neenah's most valued customers seek to deploy its products across its global operations. The premium-paper company has traditionally focused on the European transportation filtration market, but considers the area of specialty filtration media as a potential new market. As you can see, it has continued to see growth in the filtration business.Small acquisitions should add to sales growth in 2013. Demand for filtration products used in automotive applications, as well as specialty papers used in packaging and labels, is likely to rise modestly in both 2013 and 2014 due to geographic expansion and market share growth.A League of Its OwnDifferentiating from the rest of peers is key in any industry, especially the paper industry. We believe that Neenah Paper has shown much success in doing so. Neenah is that company that businesses such as Cadillac, Mary Kay, and Amazon are starting to rely on for services, and Neenah's 57% increase in stock price over the past 12 months reflects this impact. One of the reasons that Neenah has a competitive advantage over many of its peers is because of the economic moat the company has developed with its customers. For Neenah Paper's technical products business, the qualification process with such customers as 3M, Mahle, and Saint-Gobain serves as a strong barrier to entry. This is why Neenah's focus on premium niche markets has served as a compelling strategy for the company, thus allowing it to establish significant market positions based on the company's core strengths. The image below compares Neenah Paper to other paper companies in the industry including SWM, Glatfelter, Boise, Domtar, and International Paper. What this shows is the company's financial metrics have outperformed its counterparts, yet Neenah Paper's valuation measures are below the industry average. This says a lot about the Neenah, in that it does not perform like a regular paper group because of the company's different approach to the market. As part of this approach, Neenah expects to grow along with its customers to expand its current product portfolio in new geographic regions and enter into adjacent product lines that are growing and profitable.(click to enlarge)Capital AllocationNeenah Paper has delivered investors with a highly competitive return versus other choices in the equity market. For each of the past four years, total shareholder return has significantly outperformed the Russell 2000 Value index in which the company has chosen to benchmark its return against.It has paid dividends in every single year since 2005 and announced on November 19th, that its Board of Directors approved a 20 percent increase in the regular dividend on the Company's common stock.Samsung Galaxy Mobile Store The annual dividend will increase from $0.80 to $0.96 per share. John O'Donnell, Chief Executive Officer for Neenah Paper said, 'Our businesses continue to perform well and generate strong cash flows. As we have indicated in past communications, priorities for these cash flows include organic investments and acquisitions that are value-adding and drive growth, and a return of cash to our shareholders through a sustainable dividend that, over time, will provide a yield of three to four percent'.In addition, Neenah also strives to deliver consistent and attractive returns to its shareholders through disciplined financial management. In May of 2013, the company refinanced its bonds, reducing interest rates from 7.375$ to 5.25% and Neenah's debt rating was upgraded to Ba3/BB. The image below shows the management has been able to sustain its debt since 2008, thus enabling the company to deploy cash flows in ways that can create value, including maintaining a meaningful dividend.(click to enlarge)As mentioned previously, Neenah is taking on a different approach to the market relative to its competitors and has proven to be a winner in many aspects. The chart below is further evidence that Neenah is outpacing its peers. Neenah is in the upper quartile of each metric if not the leader. The company's margins are atop of the industry, while ROE, ROI, and ROA are all also above the industry average.(click to enlarge)The Bottom LineNeenah has established several strategies to create value for its customers and shareholders. One is to increase its size, growth rate, and portfolio diversification through both organic initiatives that build on the company's technologies and capabilities, and through acquisitions that fit with its competencies and provide attractive financial returns. Another strategy is to increase its participation in niche markets that can provide the company with leading positions and take advantage of its expertise as the company moves to focus on fine papers and technical products. Moreover, its financial condition has improved due to cost-reduction initiatives over the past two years and will continue to support the company's approach in delivering its high quality products to premium specialty markets. Over the long term, we expect the company to exhibit higher profits and cash flows due to growth in higher-margin businesses where it has strong technical capabilities and higher market share. These factors have led us to establish a twelve month target price of $46.00 for the company. The street is overlooking Neenah Paper's approach to the market, thus overlooking and undervaluing Neenah Paper as a growing prospect.Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)Additional disclosure: AlphaStreetResearch is a team of Investment Research Analysts. This article was written by Mr. Hunter Orr, Director of Research, with research assistance from Mr. Matthew Luber, Junior Market Insight Analyst.