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5 Stocks to Watch in a Promising Paper and Related Products Industry

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The Zacks Paper and Related Products industry is poised to gain from the surge in packaging requirements owing to rising e-commerce activities. This apart, steady demand from consumer-oriented end-markets, such as food and beverages, and healthcare, will keep supporting the industry. The growing need for sustainable and eco-friendly packaging options due to increasing environmental concerns will also act as a key catalyst for the paper industry.

International Paper Company (IP - Free Report) , Suzano (SUZ - Free Report) , Smurfit Kappa Group plc (SMFKY - Free Report) , Veritiv Corporation (VRTV - Free Report) and Mercer International (MERC - Free Report) are likely to gain from the above-mentioned trends.

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 and 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 also produces fluff and specialty pulps utilized in absorbent hygiene products, tissues and paper products. The industry caters to a wide array of industries, including food and beverage, farming, home and personal care, health, retail, e-commerce and transport. The industry players meet customers’ shipping, storage and display requirements with sustainable solutions.

Major Trends Shaping the Future of the Paper and Related Products Industry

E-commerce & Consumer Products to Support Packaging Demand: The industry’s considerable exposure to consumer-oriented end markets, including food and beverages, and healthcare, ensures steady growth in earnings. With the evolution of e-commerce, packaging 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. Per Statista, revenues in the e-commerce market are projected to grow 56% to 8.1 trillion dollars by 2025 (from $5.2 trillion in 2021), representing a major growth opportunity for the industry.

Sustainability is the Key: Increasing demand for sustainable packaging options and eco-friendly packaging solutions will support the paper market in the days ahead. The paper industry already began incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally and economically-sustainable production methods. Investment in breakthrough technologies will propel demand for high-quality paper products.

Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is witnessing rising costs for transportation, chemical and fuel, and supply-chain headwinds. Therefore, the industry players are increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.
 
Digitization is Hurting Paper Demand: The transition to digital media has been eroding the graphic-paper market for some time now. The same remains a persistent threat to the industry. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs dented graphic-paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses took a hit from pandemic-led shutdowns. The demand, however, picked up on the reopening of schools and offices.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #66, which places it in the top 26% of the 252 Zacks industries.

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish 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 a 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. Over the past three months, the industry’s earnings estimates for the current year have been revised 4% upward.

Before we present a few Paper and Related Products stocks that investors can keep an eye on, it is worth looking at the industry’s stock-market performance and its valuation picture.

Industry Versus S&P 500 & Sector

The Paper and Related Products industry has underperformed the S&P 500 as well as the sector over the past year. The stocks in this industry have fallen 26.8%, while the Basic Materials sector has lost 7.7% and the S&P 500 composite has declined 14.3% during this time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 7.49X compared with the S&P 500’s 9.76X and the Basic Material sector’s forward 12-month EV/EBITDA of 4.46X. 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 10.98X and as low as 3.75X, with the median being 8.49X.

 

5 Paper and Related Products Stocks to Keep an Eye on

Veritiv: Robust packaging sales growth and operational efficiencies across the business continue to benefit the company’s bottom-line performance. In August 2022, VRTV reported record first-quarter 2022 earnings per share of $6.12, reflecting a 278% surge from the year-ago period’s number. The upside was driven by double-digit sales growth and year-over-year adjusted EBITDA margin improvements across each of its segments. It also delivered the 10th consecutive quarter of a year-over-year improvement in adjusted EBITDA. This was instrumental in the stock’s gain of 16.8% over the past year. Veritiv’s strong earnings performance led to a record low net leverage ratio of 0.7X, which in combination with a strong free cash flow generation, provides VRTV with significant scope to drive growth. The sale of Veritiv Canada, Inc. to Imperial Dade will help VRTV focus on its strategy to invest in high-growth, higher-margin businesses and geographies, and capitalize on its industry-leading Packaging and Facility Solutions capabilities.

Atlanta, GA-based Veritiv’s earnings estimates for fiscal 2022 have moved 15% north over the past 60 days. The consensus estimate indicates growth of 136% from the year-earlier tally. VRTV has a trailing four-quarter earnings surprise of 37%, on average, a long-term estimated earnings growth of 16.9% and a Zacks Rank #1 (Strong Buy), currently

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price: VRTV

Suzano: The pulp market is witnessing positive demand amid constrained supply that shot up prices. This favorable backdrop and consistent operational performance with strong sales volume led to a record EBITDA for the Pulp segment in the second quarter of 2022. The paper segment also delivered a record EBITDA, driven by solid demand in all market segments, and higher prices. During the quarter, SUZ closed the acquisition of Parkia.  It recently announced plans to build a tissue paper and kitchen towel conversion plant in the city of Aracruz, with an annual production capacity of 60,000. Also, Suzano’s $2.8-billion Cerrado Project — expected to boost its current pulp production capacity by approximately 20% — remains on schedule to commence production in the first quarter of 2024. Once completed, the project will be the world’s largest plant with a single eucalyptus pulp production line.

The Zacks Consensus Estimate for 2022 earnings indicates growth of 157.4% from the year-ago reported figure. The consensus estimate has moved up 8% over the past 90 days.  Salvador, Brazil-based SUZ has a trailing four-quarter earnings surprise of 46.7%, on average. Suzano currently has a Zacks Rank #2 (Buy) and a long-term estimated earnings growth rate of 9.3%. The stock has dipped 1.8% in the past year.

Price: SUZ

International Paper: IP’s bottom line in the second quarter of 2022 improved 51% year over year, driven by strong demand and higher sales in its segments, and a robust operational performance, which helped offset the impact of elevated input costs. The Industrial Packaging segment continues to witness solid demand for corrugated and containerboard packaging. The Global cellulose fibers segment is riding on strong demand for fluff pulp. Benefits from price realization across International Paper’s segments and an expected contribution from Building a Better IP initiatives are likely to boost its earnings. Its efforts to reduce debt levels appear encouraging. IP is planning to increase funding for cost-reduction projects, with expected returns in excess of 25%. It continues to assess disciplined and selective M&A opportunities, particularly in the packaging businesses in North America and Europe. Mergers and acquisitions remain key strategies for IP to strengthen its packaging business.

The Zacks Consensus Estimate for the ongoing-year earnings indicates growth of 41.2% from the year-ago reported number. This Memphis, TN-based entity has a trailing four-quarter earnings surprise of 10.2%, on average. International Paper currently carries a Zacks Rank #3 (Hold). The stock has declined 40% over the past year.

Price: IP

Smurfit Kappa: SMFKY’s results have been benefiting from its focus on bringing innovative and sustainable paper-based packaging to the market and customer-focused investments undertaken over the past few years as well as strategic acquisitions. During the first half of 2022, Smurfit Kappa completed the acquisition of two corrugated converting operations in the United Kingdom and Argentina, and also announced the development of a new corrugated operation in Morocco. SMFKY recently inked a deal to acquire PaperBox, a packaging plant located in Saquarema, 70 kms east of Rio de Janeiro. This will strengthen SMFKY’s operational footprint in Brazil and help meet growing demand for innovative and sustainable packaging.

The Zacks Consensus Estimate for Dublin, Ireland-based company’s current-year earnings has moved up 6.5% over the past 90 days. The estimate indicates growth of 27.7% from the year-earlier reading. The stock has a Zacks Rank of 3 and has declined 44.6% over the past year.

Price: SMFKY


Mercer International: MERC’s second-quarter 2022 results benefited from increased pulp and lumber pricing and continued strong energy pricing. Mercer International recently completed the previously-announced acquisition of Holzindustrie Torgau (HIT), which owns, among other things, a timber processing and value-added pallet production facility in Torgau, Germany, and a wood-processing facility in Dahlen, Germany, that produces garden products. This buyout will make MERC the largest German pallet producer with an annual lumber capacity of approximately 960 MMfbm. It also diversifies its product mix with the introduction of pallets and biofuels. MERC’s board approved an incremental $27-million investment at its Spokane mass timber facility that will enable this state-of-the-art facility to fully utilize a more varied raw material mix and increase finger joint lumber production. MERC expects this to become a stepping stone to additional modest investments to increase cross-laminated timber (CLT) and glue-laminated beam capacity. The stock has gained 20.5% in a year's time.

The Zacks Consensus Estimate for 2022 earnings indicates growth of 57.4% from the prior-year level. The consensus estimate has moved up 7% over the past 90 days. Vancouver, Canada-based MERC has a trailing four-quarter earnings surprise of 11.1%, on average. The stock is currently Zacks #3 Ranked.

Price: MERC


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