Here's why this battered mid-cap's share price keeps falling

The RPC (LSE: RPC) share price has dived 13% to 675p, as I'm writing, after the plastic packaging group released its annual results this morning. The shares are now 23% lower than at the start of the year and 33% below their all-time high of 1,007p, hit less than 18 months ago.

Before I discuss why this battered FTSE 250 firm's share price keeps falling, let's take a look at the latest results and valuation of the company.

Strong numbers and cheap valuation

The headline numbers were strong. Revenue increased 36% (with 2.8% organic growth boosted by acquisitions), statutory operating profit rose 85% and statutory earnings per share (EPS) advanced 66%.

The profit numbers were still very decent on the company's non-statutory adjusted measures, with adjusted operating profit up 38% and adjusted EPS up 16% to 72p. The board increased the dividend to 28p, representing a hike of 17% on the prior year and the 25th year of consecutive dividend growth.

At the current share price, the price-to-earnings (P/E) ratio is in the sub-10 bargain basement at 9.4 and the dividend yield is a tasty 4.1%. What's not to like?

Why the share price keeps falling

I see a number of factors as significant, since the all-time high of the shares in January last year. Two months after the high, a scathing report on the company was published by Northern Trust, advising its clients to sell the stock. It reiterated this recommendation in a further report in July, following RPC's annual results.

Northern Trust suggested that RPC's multiple rights issues and acquisitions and "some of the most aggressive accounting we have seen" mask an underlying business that is delivering few real gains in true net income and free cash flow.

Following on from this and with rising concerns about plastics regulation, disclosable short positions in RPC took off in October, rising to over 3% by the year-end and to over 6% by the end of the first quarter this year. Currently, nine institutions have disclosable short positions, totalling 6.74% of the stock, and are thus positioned to profit from the company's falling share price.

Bulls and bears

Returning to today's results, some of the less impressive numbers were a drop in adjusted operating cash conversion to 77% from 95%, a fall in return on capital employed to 14.8% from 15.2% and a 4% decline in free cash flow to £229m. Bearish Northern Trust calculates free cash flow at £160m and, needless to say, retains its sell rating.

I should make it clear that there are plenty of fans of RPC among City brokers, fund managers and private investors, as well as my Foolish colleagues, who have praised its dividend record and argued that its growth outlook seems solid. Indeed, bears are very much in the minority.

Scanning private-investor chatrooms this morning, there was an air of disbelief at the market's response to RPC's results and amazement that the company is now trading on such a low P/E and generous dividend yield. A number of bullish brokers have also come out and reiterated their recommendations to buy the stock.

However, despite the cheap valuation, I personally find Northern Trust's analysis of the company and the number of shrewd hedge funds holding short positions sufficiently concerning to see RPC as a stock to avoid.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended RPC Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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