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Think the paper industry is dead?

Think again.

Neenah Paper, Inc. (NP - Snapshot Report) has soared over 35% year-to-date as the company continues to deliver solid top-line growth. It recently reported third quarter EPS that crushed the Zacks Consensus Estimate by 50%.

Neenah Paper has also been aggressively paying down its debt while saving enough room to boost its dividend for the first time. Estimates have been rising, too, sending the stock to a Zacks #2 Rank (Buy).

Earnings Per Share Beat by 50%

Neenah Paper posted third quarter earnings per share of 30 cents, beating the Zacks Consensus estimate by 10 cents. It was a 30% increase over the same quarter in 2009.

Net sales were up 7.6% year-over-year driven by an 8.8% increase in Technical Products. The Fine Products division grew by 5.9%.

Meanwhile, the overall gross margin contracted from 18.9% in the third quarter of 2009 to 17.2% due to higher manufacturing input costs, primarily for pulp. Selling, general and administrative expenses declined 8.3% over the same period, however, leading to 9.3% increase in operating income.

Outlook

Analysts revised their estimates higher for both 2010 and 2011 off the strong quarter. The Zacks Consensus Estimate for 2010 is $1.42, representing 87% growth over 2009 EPS. The 2011 estimate is currently $1.63, equating to 15% EPS growth.

It is a Zacks #2 Rank (Buy) stock.

Income

Neenah Paper has been heavily focused on paying down its debt recently. The company has spent over $80 million year-to-date repaying long-term debt.

Despite this, the company recently announced it was raising its quarterly dividend 10% to 11 cents per share. This marks the first increase since the company began paying a dividend in 2005. The stock has a dividend yield of 2.1%.

This is in contrast to competitor International Paper (IP) who slashed its quarterly dividend in 2009 from 25 cents to 2.5 cents per share. IP did raise it in early 2010, but only to 12.5 cents - half of what it was before.

Valuation

Valuation looks very reasonable for NP. Shares are trading at 13.4x forward estimates, in-line with the peer group.

Its price to book ratio of 1.7 is also in-line. The company's return on equity of 16.8% trumps the industry average of 10.0%, however.

Neenah Paper, Inc. was founded in 2004 and is headquartered in Alpharetta, Georgia. It has a market cap of $285 million.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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