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5 Stocks To Watch as Paper Industry Rides on Packaging Demand
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The Zacks Paper and Related Products industry is gaining from the e-commerce boom as customers are staying indoors amid the COVID-19 pandemic. Surging demand for food, beverage and hygiene products amid the global health crisis is fueling growth for the industry as packaging is an essential element for distribution of these products.
International Paper Company (IP - Free Report) , Smurfit Kappa Group plc (SMFKY - Free Report) , Domtar Corporation , Veritiv Corporation and Clearwater Paper Corporation (CLW - Free Report) are some stocks, which are likely to gain from this trend. However, a shrinking graphic paper market, due to increased digitization, remains a headwind for the industry.
Industry Description
The Zacks Paper and Related Products industry comprises companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products, ranging from graphic paper, packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers, and newsprint, are utilized for communication purposes. The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products. It caters to a wide array of industries, ranging from food and beverage, farming, home and personal care, health, retail, e-commerce and transport, among others. The industry players meet customers’ shipping, storage and display requirements with sustainable solutions.
Major Trends Shaping the Future of Paper and Related Products Industry
E-commerce & Robust Demand for Consumer Products: The industry’s considerable exposure to consumer-oriented end-markets, such as food and beverages, and healthcare, ensures steady growth and earnings. With the evolution of e-commerce, packaging has gained utmost importance as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product. The COVID-19 pandemic has led to a spike in demand for essential products as well as e-commerce activities, favoring the industry’s paper packaging solutions. Even when the situation stabilizes, packaging demand from a booming e-commerce market and the consumer-oriented markets will continue to support the industry. Per Statista, revenues in the e-commerce market are projected to see a CAGR of 6.3% over 2021-2025, which represents a major growth opportunity for the industry.
Sustainability is the Key: Increasing demand for sustainable packaging options and eco-friendly packaging solutions will support the paper market in the days ahead. The paper industry has already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally- and economically-sustainable production methods. Investment in breakthrough technologies will propel demand for high-quality paper products.
Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is currently witnessing rising transportation, chemical and fuel costs, and supply chain headwinds. Therefore, the industry players are increasingly focusing on pricing actions, cost reduction and resorting to automation in manufacturing to boost productivity and increase efficiency.
Digitization is Hurting Paper Demand: The transition to digital media has been eroding the graphic-paper market for some time now and is a persistent threat to the industry. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs have dented the graphic-paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses has been affected due to the shutdowns during the pandemic. Even though schools and offices are now reopening and there has been a pickup in demand for paper, the spread of the highly contagious Delta variant might cut this recovery short.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #62, which places it at the top 25% of the 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have been revised upward by 38%.
Before we present a few Paper and Related Products stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Paper and Related Products industry has outperformed the S&P 500 as well as the sector over the past year. The stocks in this industry have gained 37.5% compared with the S&P 500’s and the Basic Materials sector’s rally of 29.7% and 17.5%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 8.82x compared with the S&P 500’s 14.75x and the Basic Material sector’s forward 12-month EV/EBITDA of 4.20x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 11.71x and as low as 4.92x, with the median being 8.42x.
5 Paper and Related Products Stocks to Watch
Veritiv: Robust packaging sales growth and operational efficiencies across the business continues to benefit its bottom-line performance. In fact, the company delivered its best adjusted EBITDA performance for any quarter in company history in the second quarter of 2021. This has been instrumental in the stock’s gain of 349.8% year to date. The earnings momentum and record low leverage enabled the company to expand its share repurchase program to $100 million in the second quarter, while also investing in growth. Its ongoing restructuring plan will boost margins. Investment and acquisitions in high growth, higher-margin sectors, strengthening e-commerce sales and boosting technical capabilities remain key growth drivers.
The Atlanta, GA-based company’s earnings estimate for fiscal 2021 has moved 46% north in 60 days’ time. This company has a trailing four-quarter earnings surprise of 1,777%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: VRTV
Clearwater Paper: In paperboard, the company continues to experience strong demand and robust backlog levels. The Pulp and Paperboard business will gain from growing sustainable packaging trends. Its commitment to reducing debt levels and a prudent capital structure provide ample liquidity. Continued focus on operational execution will drive margins. The company’s move to close Neenah, WI facility is a wise initiative as it will reduce its cost position. The stock has appreciated 1.4% so far this year.
The Zacks Consensus Estimate for 2021 earnings is currently pegged at 76 cents, which marks a turnaround from a loss of 15 cents anticipated 60 days ago. The Spokane, WA-based company has a trailing four-quarter earnings surprise of 3.1%, on average. The stock carries a Zacks Rank #2 (Buy).
Price: CLW
Smurfit Kappa: The company is gaining from strong corrugated volume growth. Smurfit Kappa is accelerating its capital investment plans focusing on several high return projects that will enhance shareholder returns. The company recently announced that it has agreed to acquire Verzuolo, a state of the art recycled containerboard mill with a capacity of 600,000 tons. This mill that is strategically positioned in Northern Italy, is highly complementary to the company’s existing footprint and is expected to be immediately accretive to earnings. The company has also recently acquired two operations in Peru and Mexico, augmenting its geographic presence. Aided by these factors, the stock has gained 12% so far this year.
The Zacks Consensus Estimate for Dublin, Ireland-based company’s current-year earnings has moved up 4% over the past 60 days. The stock carries a Zacks Rank #3 (Hold).
Price: SMFKY
International Paper: Robust corrugated packaging demand and rising e-commerce activities on account of the pandemic are driving the company’s performance and led to price appreciation of 7.1% so far this year. Strong consumer demand for absorbent hygiene and pulp products also bodes well. Its efforts to reduce debt levels appear encouraging. International Paper has completed the spin-off of its Printing Papers segment that will enable the company to focus on its Industrial Packaging segment, and capitalize on the growing demand for corrugated packaging, cut costs and improve earnings.
The Zacks Consensus Estimate for ongoing-year earnings has moved up 1% over the past 60 days. The Memphis, TN-based company has a trailing four-quarter earnings surprise of 16.7%, on average. It currently carries a Zacks Rank #3.
Price: IP
Domtar: Stellar demand in tissue and towel will continue to fuel demand for softwood and fluff pulp. The company’s paper business has been witnessing improved sales over the past few months and is expected to pick up momentum through the year as people return to schools and offices. As part of its asset conversion roadmap, the company has identified up to four large scale paper machine/mill repurposing projects that will help it capitalize on the growing containerboard market in North America. Backed by the momentum in its end-markets, expected benefits from its cost-control actions and focus on improving productivity, the company’s shares have gained 73.8% so far this year.
The Zacks Consensus Estimate for current-year earnings has moved north by 8% over the past 60 days. The Fort Mill, SC-based company has a trailing four-quarter earnings surprise of 26.2%, on average. The stock carries a Zacks Rank #3.
Price: UFS
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5 Stocks To Watch as Paper Industry Rides on Packaging Demand
The Zacks Paper and Related Products industry is gaining from the e-commerce boom as customers are staying indoors amid the COVID-19 pandemic. Surging demand for food, beverage and hygiene products amid the global health crisis is fueling growth for the industry as packaging is an essential element for distribution of these products.
International Paper Company (IP - Free Report) , Smurfit Kappa Group plc (SMFKY - Free Report) , Domtar Corporation , Veritiv Corporation and Clearwater Paper Corporation (CLW - Free Report) are some stocks, which are likely to gain from this trend. However, a shrinking graphic paper market, due to increased digitization, remains a headwind for the industry.
Industry Description
The Zacks Paper and Related Products industry comprises companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products, ranging from graphic paper, packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers, and newsprint, are utilized for communication purposes. The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products. It caters to a wide array of industries, ranging from food and beverage, farming, home and personal care, health, retail, e-commerce and transport, among others. The industry players meet customers’ shipping, storage and display requirements with sustainable solutions.
Major Trends Shaping the Future of Paper and Related Products Industry
E-commerce & Robust Demand for Consumer Products: The industry’s considerable exposure to consumer-oriented end-markets, such as food and beverages, and healthcare, ensures steady growth and earnings. With the evolution of e-commerce, packaging has gained utmost importance as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product. The COVID-19 pandemic has led to a spike in demand for essential products as well as e-commerce activities, favoring the industry’s paper packaging solutions. Even when the situation stabilizes, packaging demand from a booming e-commerce market and the consumer-oriented markets will continue to support the industry. Per Statista, revenues in the e-commerce market are projected to see a CAGR of 6.3% over 2021-2025, which represents a major growth opportunity for the industry.
Sustainability is the Key: Increasing demand for sustainable packaging options and eco-friendly packaging solutions will support the paper market in the days ahead. The paper industry has already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally- and economically-sustainable production methods. Investment in breakthrough technologies will propel demand for high-quality paper products.
Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is currently witnessing rising transportation, chemical and fuel costs, and supply chain headwinds. Therefore, the industry players are increasingly focusing on pricing actions, cost reduction and resorting to automation in manufacturing to boost productivity and increase efficiency.
Digitization is Hurting Paper Demand: The transition to digital media has been eroding the graphic-paper market for some time now and is a persistent threat to the industry. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs have dented the graphic-paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses has been affected due to the shutdowns during the pandemic. Even though schools and offices are now reopening and there has been a pickup in demand for paper, the spread of the highly contagious Delta variant might cut this recovery short.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #62, which places it at the top 25% of the 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have been revised upward by 38%.
Before we present a few Paper and Related Products stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Paper and Related Products industry has outperformed the S&P 500 as well as the sector over the past year. The stocks in this industry have gained 37.5% compared with the S&P 500’s and the Basic Materials sector’s rally of 29.7% and 17.5%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 8.82x compared with the S&P 500’s 14.75x and the Basic Material sector’s forward 12-month EV/EBITDA of 4.20x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 11.71x and as low as 4.92x, with the median being 8.42x.
5 Paper and Related Products Stocks to Watch
Veritiv: Robust packaging sales growth and operational efficiencies across the business continues to benefit its bottom-line performance. In fact, the company delivered its best adjusted EBITDA performance for any quarter in company history in the second quarter of 2021. This has been instrumental in the stock’s gain of 349.8% year to date. The earnings momentum and record low leverage enabled the company to expand its share repurchase program to $100 million in the second quarter, while also investing in growth. Its ongoing restructuring plan will boost margins. Investment and acquisitions in high growth, higher-margin sectors, strengthening e-commerce sales and boosting technical capabilities remain key growth drivers.
The Atlanta, GA-based company’s earnings estimate for fiscal 2021 has moved 46% north in 60 days’ time. This company has a trailing four-quarter earnings surprise of 1,777%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: VRTV
Clearwater Paper: In paperboard, the company continues to experience strong demand and robust backlog levels. The Pulp and Paperboard business will gain from growing sustainable packaging trends. Its commitment to reducing debt levels and a prudent capital structure provide ample liquidity. Continued focus on operational execution will drive margins. The company’s move to close Neenah, WI facility is a wise initiative as it will reduce its cost position. The stock has appreciated 1.4% so far this year.
The Zacks Consensus Estimate for 2021 earnings is currently pegged at 76 cents, which marks a turnaround from a loss of 15 cents anticipated 60 days ago. The Spokane, WA-based company has a trailing four-quarter earnings surprise of 3.1%, on average. The stock carries a Zacks Rank #2 (Buy).
Price: CLW
Smurfit Kappa: The company is gaining from strong corrugated volume growth. Smurfit Kappa is accelerating its capital investment plans focusing on several high return projects that will enhance shareholder returns. The company recently announced that it has agreed to acquire Verzuolo, a state of the art recycled containerboard mill with a capacity of 600,000 tons. This mill that is strategically positioned in Northern Italy, is highly complementary to the company’s existing footprint and is expected to be immediately accretive to earnings. The company has also recently acquired two operations in Peru and Mexico, augmenting its geographic presence. Aided by these factors, the stock has gained 12% so far this year.
The Zacks Consensus Estimate for Dublin, Ireland-based company’s current-year earnings has moved up 4% over the past 60 days. The stock carries a Zacks Rank #3 (Hold).
Price: SMFKY
International Paper: Robust corrugated packaging demand and rising e-commerce activities on account of the pandemic are driving the company’s performance and led to price appreciation of 7.1% so far this year. Strong consumer demand for absorbent hygiene and pulp products also bodes well. Its efforts to reduce debt levels appear encouraging. International Paper has completed the spin-off of its Printing Papers segment that will enable the company to focus on its Industrial Packaging segment, and capitalize on the growing demand for corrugated packaging, cut costs and improve earnings.
The Zacks Consensus Estimate for ongoing-year earnings has moved up 1% over the past 60 days. The Memphis, TN-based company has a trailing four-quarter earnings surprise of 16.7%, on average. It currently carries a Zacks Rank #3.
Price: IP
Domtar: Stellar demand in tissue and towel will continue to fuel demand for softwood and fluff pulp. The company’s paper business has been witnessing improved sales over the past few months and is expected to pick up momentum through the year as people return to schools and offices. As part of its asset conversion roadmap, the company has identified up to four large scale paper machine/mill repurposing projects that will help it capitalize on the growing containerboard market in North America. Backed by the momentum in its end-markets, expected benefits from its cost-control actions and focus on improving productivity, the company’s shares have gained 73.8% so far this year.
The Zacks Consensus Estimate for current-year earnings has moved north by 8% over the past 60 days. The Fort Mill, SC-based company has a trailing four-quarter earnings surprise of 26.2%, on average. The stock carries a Zacks Rank #3.
Price: UFS