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5 Top Stocks to Capitalize on Promising 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 amid the COVID-19 pandemic. Moreover, surging demand for food, beverage and hygiene products amid the global health crisis is fueling growth as packaging is an essential element for distribution of these products.

International Paper Company (IP - Free Report) , Smurfit Kappa (SMFKY - Free Report) , Domtar Corporation (UFS - Free Report) , Veritiv Corporation (VRTV - Free Report) and Mercer International Inc. (MERC - Free Report) are some stocks, which are likely to gain from this trend. However, a shrinking graphic paper market, due 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 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

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 be durable to withstand the complexity involved in delivering the product. Additionally, the COVID-19 pandemic has been fueling demand for essential products, such as food and medicine, health and hygiene and e-commerce activities. This has stoked demand for the industry’s paper packaging solutions. 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. The industry has been plagued with rising transportation, chemical and fuel costs. Therefore, the industry players are focused on cost reduction and resorting to automation in manufacturing to boost productivity and increase efficiency.
 
Digitization Denting 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. Apart from this, paper consumption in schools, offices and businesses has been affected by the coronavirus mayhem, straining demand for graphic papers. Thus, 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 #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 26%.

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 & 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 88.3% compared with the S&P 500’s growth of 40.4%. Meanwhile, the Basic Materials sector has rallied 57%.

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 11.03x compared with the S&P 500’s 15.72x and the Basic Material sector’s forward 12-month EV/EBITDA of 4.37x. 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 6.41x.

 

5 Paper and Related Products Stocks to Bet On

Mercer International: Based in Vancouver, Canada, Mercer International manufactures and sells northern bleached softwood kraft pulp.

The company is gaining from strong pulp market fundamentals, which is being supported by steady demand particularly in China amid reduced supply. Lumber pricing and demand will also be supported by solid housing market and steady home renovation related demand, while supply is low. Backed by its strong liquidity position, the company is investing in projects that will enable it to transform its supply chain, increase capacity and reduce the cost of production.

The Zacks Consensus Estimate for 2021 earnings has been revised upward by 29% in 60 days’ time to $1.76. The company’s shares have gained 76% in the past six months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price: MERC

Veritiv: Based in Atlanta, GA, Veritiv is a business-to-business full-service provider of value-added packaging products and services, as well as facility solutions, print and publishing products and services. Additionally, the company provides logistics and supply chain management solutions to its customers.

Robust packaging sales growth and operational efficiencies across the business continues to benefit its bottom-line performance. Strong earnings and disciplined working capital management has enabled the company to lower net leverage, and expand capacity to deploy capital in support of its strategic priorities. Further, its restructuring plan will aid margins. The recent sale of the Roll Source specialty business will allow Veritiv to intensify focus on its core product and service offerings.

The company’s earnings estimate for fiscal 2021 has moved 66.7% north in 60 days’ time to $4.50. This Zacks #1 Ranked company has a trailing four-quarter earnings surprise of 1856%, on average. The stock has surged 223.4% over the past six months.

Price: VRTV


International Paper: 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 driving the company’s performance. Strong consumer demand for absorbent hygiene and pulp products also bodes well. Its efforts to reduce debt levels appear encouraging. Further, the spin-off its Printing Papers segment, which is expected to be completed this year, will enable International Paper to focus on its Industrial Packaging segment, and capitalize on the growing demand for corrugated packaging, cut costs and improve earnings.

The stock has appreciated 28% in the past six months. The Zacks Consensus Estimate for ongoing-year earnings has moved up 21.7% over the past 60 days to $4.68. The company has a trailing four-quarter earnings surprise of 42.2%, on average.  It currently sports a Zacks Rank #2 (Buy).

Price: IP



 

Domtar: 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. 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. In addition, it will benefit from its cost-control actions and focus on improving productivity.

The Zacks Consensus Estimate for current-year earnings has moved north by 27% over the past 60 days to $3.66. The stock has gained 74.6% over the past six months. The company has a trailing four-quarter earnings surprise of 73.4%, on average. The stock carries a Zacks Rank #2.

Price: UFS


 

Smurfit Kappa: Dublin, Ireland-based Smurfit Kappa Group together with its subsidiaries, manufactures, distributes, and sells paper-based packaging products.

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. These include the construction of mega plants and the acquisition of many converting machines in order to meet escalating customers’ demand. Meanwhile, the company is also committed to its cost optimization programs.

The Zacks Consensus Estimate for current-year earnings has moved up 6% over the past 60 days to $3.05. The stock has gained 24% over the past six months. The stock carries a Zacks Rank #2.

Price: SMFKY


 

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