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4 Top Stocks to Pick From the Flourishing Paper Industry

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The Zacks Paper and Related Products industry is gaining from the e-commerce boom as customers are staying indoors owing to the pandemic-induced containment measures. Moreover, surging demand for food, beverage and hygiene products amid the global health crisis is fueling growth as packaging is an essential element for the distribution of these products.

International Paper Company (IP - Free Report) , WestRock Company (WRK - Free Report) , Domtar Corporation (UFS - Free Report) and Clearwater Paper Corporation (CLW - Free Report) are some stocks, which are likely to gain from this trend. However, a shrinking graphic paper market, thanks to increased digitization, is 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 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?

 

Soaring Demand for Essential 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 in the past few years, packaging has gained utmost importance as it has to maintain the integrity of the product and durability to withstand the complexity involved in delivering the product. On top of that, the COVID-19 pandemic is spurring demand for essential products, such as food and medicine, health and hygiene, in turn, stoking demand for the industry’s paper packaging solutions. The coronavirus crisis is driving e-commerce activities significantly. 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 projected to see a CAGR of 6.3% over 2021-2025.

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 are resorting to digital manufacturing for the same.  

Digitization Denting 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. Apart from this, paper consumption in schools, offices and businesses has been affected by the coronavirus mayhem, 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 Zacks Paper and Related Products industry is a 16-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #31, which places it at the top 12% 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. In the past six months, the industry’s earnings estimates for the current year have been revised upward by 78%.

Our proprietary Heat Map shows that the industry’s rank has remained in the top half for the past seven weeks.


 

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

Industry Outperforms S&P 500, Lags Sector

The Paper and Related Products industry has outperformed the S&P 500, while trailing the sector over the past year. The stocks in this industry have gained 17.3% compared with the S&P 500’s rally of 16.1%. Meanwhile, the Basic Materials sector has appreciated 27%.

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 10.63x compared with the S&P 500’s 17.20x and the Basic Material sector’s forward 12-month EV/EBITDA of 6.11x. 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 11.52x and as low as 4.91x, with the median at 5.99x.

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

Domtar Corporation: This Fort Mill, SC-based company is a manufacturer and distributor of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. Stellar demand in tissue and towel will continue to fuel demand for softwood and fluff pulp, while growth in the attractive containerboard market will act as a catalyst. The company is well poised to gain from the improving sales in the paper business. In addition, it will benefit from its cost-control actions and focus on asset conversion.

The Zacks Consensus Estimate for current-year earnings has moved 44.3% north over the past 60 days to $2.28. The stock has gained 41.3% over the past six months. The company has a trailing four-quarter earnings surprise of 163.3%, on average. The stock sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: UFS



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 owing 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. Additionally, the company’s focus on reducing debt levels and a prudent capital structure provide ample liquidity.

The Zacks Consensus Estimate for 2021 earnings has been revised upward by 30.5% in 60 days’ time to $3.12. The company’s shares have lost 0.2% in the past six months. However, it currently flaunts a Zacks Rank of 1 and has a trailing four-quarter average earnings surprise of 233.3%.



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. Robust corrugated packaging demand and rising e-commerce activities on account of the pandemic are supporting the company’s performance. Furthermore, 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 appreciated 42% in the past six months. The Zacks Consensus Estimate for ongoing-year earnings has moved up 16.3% over the past 60 days to $3.92. The company currently carries a Zacks Rank #2 and has a trailing four-quarter average earnings surprise of 47.5%.

Price & Consensus: IP



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

The company’s earnings estimate for fiscal 2021 has moved 10.8% north in 60 days’ time and is currently pinned at $3.59. This Zacks #2 Ranked company has a trailing four-quarter average earnings surprise of 26.2%. The stock has gained 48.9% over the past six months.



Price & Consensus: WRK



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