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4 Top Stocks From the Paper Industry to Watch Out For

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The Zacks Paper and Related Products industry is poised to grow on the booming e-commerce activities as customers are spending more time indoors owing to COVID-19-induced containment measures. Escalating demand for food, beverage and hygiene products amid the pandemic is driving growth as packaging is an essential element for the distribution of these products.

International Paper Company (IP - Free Report) , WestRock Company (WRK - Free Report) , P.H Glatfelter Company (GLT - Free Report) and Clearwater Paper Corporation (CLW - Free Report) are some stocks, which are likely to gain from the abovementioned industry trend. However, a shrinking graphic paper market, thanks to increased digitization, is concerning for the industry.

Industry Description

The 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 primarily include printing and writing papers, and newsprint, are utilized for communication purposes. The industry also provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. In addition, it produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products. The industry participants serve a wide array of industries, ranging from food and beverage, farming and agriculture, home and personal care, health, retail and e-commerce to shipping and transport, among others.

What’s Shaping the Future of the Paper and Related Products Industry

Rising Demand for Consumer Products & E-commerce: The industry’s considerable exposure (more than 60%) to consumer-oriented end-markets, such as food and beverages, and healthcare, ensures steady growth and earnings. Moreover, with the evolution of e-commerce over the past few years, packaging has gained utmost importance as it has to maintain the integrity of the product and be durable enough to withstand the complex process involved in delivering the product. The COVID-19 pandemic has fueled demand for essential products, such as food and medicine, in turn boosting demand for the industry’s packaging solutions and also led to a surge in e-commerce activities. Even after the situation stabilizes, packaging demand from a booming e-commerce market and the consumer-oriented markets will continue to support the industry. Notably, per Statista, revenues in the e-commerce market are expected to see a CAGR of 8.2% over 2020-2024.

Focus on Eco-Friendly Packaging: 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. Further, investment in breakthrough technologies will propel demand for high-quality paper products. Apart from high raw-material costs, the industry has been plagued with rising transportation, chemical and fuel costs. Therefore, the industry players are focused on cost reduction and resorting to digital manufacturing for the same.  

Increased Digitization Weighs on Paper Demand: The transition to digital media has been eroding the graphic-paper market for some time now and is a prevalent threat. 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. On top of this, paper consumption in schools, offices and businesses has been affected by the coronavirus pandemic, straining demand for graphic papers. Therefore, industry players have taken actions to reduce paper capacity in line with current and expected demand levels. Bleak paper demand will continue to weigh on the industry in the near term.

Zacks Industry Rank Indicates Bright Prospects

The Paper and Related Products industry is a 16-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #124, which places it at the top 49% of the 251 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.

Before we present a few Paper and Related Products stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s stock-market performance and valuation picture.

Industry Lags S&P 500 and Sector

The Paper and Related Products industry has underperformed the S&P 500 and the sector over the past year. The stocks in this industry have gained 3.9% compared with the S&P 500’s growth of 15.9% and the Basic Materials sector’s 13%.

One-Year Price Performance

Paper and Related Products Industry’s Valuation

On the basis of the trailing 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 10.83x compared with the S&P 500’s 12.80x and the Basic Material sector’s forward 12-month EV/EBITDA of 6.08x. 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 11.75x and as low as 4.85x, with the median at 5.96x.

4 Paper and Related Products Stocks to Keep a Close Eye On

We are presenting four stocks that carry either a Zacks Rank #2 (Buy) or 3 (Hold), which investors can take a look at. These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

P.H Glatfelter Company: This Zacks Rank #2 York, PA-based company is a leading global supplier of engineered materials. The company is poised to gain from strong demand in engineered materials that are essential for producing a variety of consumer staples. Robust demand for home care, and health and hygiene products will also stoke growth. Glatfelter’s balance sheet strength, ongoing transformation into a cost-effective business, along with its essential consumer staples product portfolio, places it well to sail through the pandemic-induced crisis.

The Zacks Consensus Estimate for current-year earnings has moved north 3.8% over the past 60 days to 80 cents per share. The stock has gained 6.6% over the past six months. The company has a trailing four-quarter earnings surprise of 24.6%, on average.

Price & Consensus: GLT

Clearwater Paper Corporation: Based in Spokane, WA, Clearwater is a manufacturer and foremost supplier of quality consumer tissue, away-from-home (AFH) tissue, parent roll tissue and bleached paperboard. Elevated demand for tissue products primarily due to the COVID-19 pandemic will drive the company’s top line. The company is on track to achieve operational and financial benefits from the Shelby expansion. Its Paperboard business will gain from sustainable packaging trends and foodservice products. Moreover, the company’s focus on reducing debt levels and a prudent capital structure provide ample liquidity.

The Zacks Consensus Estimate for current-year earnings has been revised upward by 76% over the past 60 days to $4.62 per share. The company’s shares have gained 19.3% over the past six months. It currently has a Zacks Rank #2 and a trailing four-quarter average earnings surprise of 212.4%.

Price & Consensus: CLW

International Paper Company: Based in Memphis, TN, International Paper is a global producer of renewable fiber-based packaging, pulp and paper products. Strong corrugated packaging demand and rising e-commerce activities on account of the coronavirus pandemic are driving the company’s performance. Further, it is witnessing strong demand, driven by processed food, beverage, proteins, chemicals, paper tissue and towel. The company’s focus on increasing investments in the North American Industrial Packaging business also bodes well.

The stock has gained 5% over the past six months. The Zacks Consensus Estimate for current-year earnings has moved 19.9% upward over the past 60 days to $2.35 per share. The company currently has a Zacks Rank #3 and a trailing four-quarter average earnings surprise of 37.8%.

Price & Consensus: IP

WestRock Company: Based in Norcross, GA, WestRock is a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. The company’s consumer packaging business is gaining from sustainable packaging options as well as significant demand in food, food service, and beverage packaging categories. The KapStone acquisition and strong growth in e-commerce activities are also driving results. The company is focused on meeting customer demand and executing strategies for financial strength and substantial liquidity to counter the pandemic-related setbacks.

The company’s earnings estimates for fiscal 2020 have moved 14.8% north over the past 60 days and are currently pegged at $2.55 per share. This Zacks Rank #3 company has a trailing four-quarter average earnings surprise of 22.2%. Its shares have gained 2% over the past six months.

Price & Consensus: WRK

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