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Dim Near-Term Outlook for Paper and Related Products Industry

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The Paper And Related Products industry comprises an array of companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products which range from graphic paper, packaging paper to absorbent hygiene products.
 
Graphic papers are used for communication purposes which primarily include printing and writing papers, and newsprint. The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products. The industry has an extensive customer base ranging from food and beverage, farming and agriculture, home and personal care, health, retail and e-commerce to shipping and transport industries, among others.
 
Let us take a look at the three major themes in the industry:
 
  • The transition to digital media is an ever-looming threat to the graphic paper segment which has been suffering declines over the past few years. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs has taken a toll on graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers.
     
  • The paper and related products industry will be spurred by packaging demand, going forward. The global paper & paperboard packaging market, which was at $175 billion in 2017, is expected to reach $267 billion by 2026, at a CAGR of 4.8%. Growing consumer awareness regarding sustainable packaging, preference over plastic, skyrocketing e-commerce activities and increasing demand for hygiene products are some of the factors favoring market growth. Moreover, improving disposable incomes of people, especially in the developing countries is one of the primary catalysts.
     
  • Apart from high raw material costs, the industry has been affected by rising transportation costs, chemical costs and fuel costs lately. The companies in the industry are focused on cost reduction programs and are resorting to digital manufacturing in order to reduce costs further. The paper industry has already begun to incorporate recycled content into its production methods. By maximizing recycling, the industry will be better able to support rising standards of living worldwide while implementing environmentally and economically sustainable production methods. Further, investment in breakthrough technologies will spur demand for high-quality paper products.

Zacks Industry Rank Indicates Dismal Prospects
 
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Paper and Related Products Industry, which is an 18-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #167, which places it at the bottom 35% of 256 Zacks industries. 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.
 
Despite the bleak near-term prospects of the industry, we will present a few paper and related products stocks that can be retained in one’s portfolio given their prospects in the long haul. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
 
Industry Outperforms Sector but Lags S&P 500
 
The Paper And Related Products 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 11.8% compared with the sector’s decline of 13.9%. Meanwhile, the Zacks S&P 500 composite has witnessed growth of 1.7%.

One-Year Price Performance

 
 
Paper And Related Products Industry’s Valuation 
 
On the basis of 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 4.7x compared with the S&P 500’s 10.5x and the Basic Material sector’s forward 12-month EV/EBITDA of 5.2X. 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 7.8X and as low as 4.3X, recording the median of 6.8X.
 
Bottom Line
 
The paper and related products industry will continue to grow on the back of rising global demand for paper packaging, tissue papers and hygiene products. Preference over plastic, boom in e-commerce and demand in developing countries will help sustain demand.
 
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three with a Zacks Rank #2 (Buy) that investors may consider betting on.
 
 
Verso Corporation (VRS - Free Report) : The consensus EPS estimate for this Miamisburg, OH-based company has moved 14% upward for the current year over the last 60 days. This Zacks Rank #1 stock has rallied 119% over the past year.
 
Price: VRS
 
 
Domtar Corporation (UFS - Free Report) : The consensus EPS estimate for this Fort Mill, SC-based company has moved 17% upward for the current year over the last 60 days. This stock carries a Zacks Rank #2.
 
Price: UFS
 
 
Mondi plc (MONDY - Free Report) : Based in Addlestone, the United Kingdom, the company has seen a 4% increase in its earnings estimates over the last 60 days. It carries a Zacks Rank #2.
 
Price: MONDY
 
 
Svenska Cellulosa Aktiebolaget SCA (SVCBY - Free Report) : The Zacks Consensus Estimate of this Sundsvall, Sweden-based company has gone up 22% in the last 60 days. The stock currently carries a Zacks Rank #2.
 
Price: SVCBY
 
 
More Stock News: This Is Bigger than the iPhone!
 
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
 
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020. 
 


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