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Containers - Paper & Packaging Outlook: Encouraging Prospects

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The Zacks Containers - Paper And Packaging industry primarily includes companies which manufacture paper and plastic-based packaging products utilized within consumer and industrial end markets. Their products range includes containerboard and corrugated packaging, flexible, and rigid plastic packaging, among others.
 
The industry caters to a wide variety of markets including food, beverage, foodservice and other consumer products like beauty, personal care, home care, to name a few. The industry also serves the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets.
 
Let us take a look at the three major themes currently governing the industry:
  • Demand in the Containers - Paper And Packaging industry is usually fairly stable across economic cycles, due to its high exposure (more than 60%) to stable consumer-oriented end-markets, such as food and beverages and healthcare as they include essentials used in day-to-day lives. Favorable consumer spending, a strong labor market, rising government expenditures and increased consumer confidence instill optimism. Further, rapid urbanization and rising purchasing power in Asia, particularly China, India, and Southeast Asia will sustain demand for packaging going forward. Demand for sophisticated packaging for several consumer goods and products is on the rise and the industry is constantly striving to meet this by adopting new technology and innovative products. It is also likely to gain from capitalizing on growing global demand for eco-friendly biodegradable packaging materials spurred by environmental concerns.
     
  • The evolution of e-commerce has significantly impacted demand in the industry with every passing year. Packaging has gained utmost importance as it not only has to maintain the safety of the product but also be durable enough to withstand the complex automated and manual supply chains involved in delivering the product. According to Statista, global retail e-commerce sales amounted to $2.3 trillion in 2017 and likely to grow to $4.88 trillion in 2021. In developed markets, e-commerce has become second nature for consumers, while developing countries are catching up now. India is one of the fastest growing e-commerce markets and according to the India Brand Equity Foundation, the India e-commerce market is expected to reach $200 billion by 2026 from $39 million in 2017. India is expected to surpass the United States to become the second largest e-commerce market in the world by 2034, driven by ongoing digital transformation in the country. Among others, South East Asia and Latin America are also picking up pace.
     
  • Apart from high raw material costs, the industry has been affected by rising transportation costs, chemical costs and fuel costs lately. Thus, the companies have to pass through as much of the raw-material price inflation as possible to customers. However, it might not always be feasible to pass on the price increase to customers. Consequently, the companies are now focusing on reducing costs, improving productivity and in turn increasing profitability.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Containers - Paper And Packaging industry is housed within the broader Zacks Industrial Products sector. It currently carries a Zacks Industry Rank #37, which places it at the top 15% of more than 250 Zacks industries.
 
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
 
Our proprietary Heat Map shows that the industry’s rank has entered the top half after languishing in the bottom half for the past six weeks. 
 
 
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. In the past year, the industry’s earnings estimates for the current year have been revised upward by 5%.
 
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
 
Industry Outperforms Sector but Lags S&P 500
 
The Containers - Paper And Packaging industry has outperformed its own sector over the past year. However, it has underperformed the Zacks S&P 500 composite over the same time frame.
 
Over this period, the industry has fallen 21.6% compared with the sector’s decline of 23.9%. Meanwhile, the Zacks S&P 500 composite has declined 7.6%.
 
One-Year Price Performance
 
 
Containers - Paper And Packaging Industry’s Valuation 
 
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Containers - Paper And Packaging companies, we see that the industry is currently trading at 9.1 compared with the S&P 500’s 9.8x and the Industrial Products sector’s forward 12-month EV/EBITDA of 10.9. 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 12.7x to as low as 9.0x, recording the median of 10.8x.
 
Bottom Line
 
The Containers - Paper And Packaging industry will be supported by continued demand growth, backed by new technology and innovative products. The industry is not only focused on containing and protecting the product but is now also providing sustainable packaging solutions to cater to increasing consumer awareness on environmental issues. Consequently, industry players will benefit from focus on maintaining quality of the package, conforming to industry-standards and ability to minimize carbon footprint.
 
Further, the boom in e-commerce will sustain demand in years to come. However, higher costs from rising fuel and freight charges, and volatile raw material may weigh on the near-term prospects of the industry.
 
We are presenting three stocks with a Zacks Rank #2 (Buy) that investors may consider betting on.
 
 
Bemis Company, Inc. : This Neenah, WI-based supplier of flexible and rigid plastic packaging company has delivered a positive average earnings surprise history of 4.17% over the trailing four quarters. The Zacks Consensus Estimate for the company’s earnings for fiscal 2018 reflects growth of 16.7%. The company has an estimated long-term earnings growth rate of 20.7%.
 
Price and Consensus: BMS
 
 
Sealed Air Corporation (SEE - Free Report) : This Charlotte, NC-based company provides food safety and security, and product protection solutions worldwide. The company has a positive average earnings surprise history of 3.94% over the trailing four quarters. The Zacks Consensus EPS estimate for fiscal 2018 reflects year-over-year growth of 34.3%. The company has estimated long-term earnings growth rate of 12.2%.
 
Price and Consensus: SEE
 
 
UFP Technologies, Inc. (UFPT - Free Report) : This Newburyport, MA-based company designs and manufactures a range of high-performance cushion packaging and specialty foam and plastic product for the industrial and consumer markets. The company’s Zacks Consensus Estimate for earnings reflects growth of 53.6% for fiscal 2018. The company has a positive average earnings surprise history of 56.74% over the trailing four quarters.
 
Price and Consensus: UFPT
 
 
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