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3 Paper and Related Products Stocks to Ride the Demand Strength
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The Zacks Paper and Related Products industry is poised to gain from the surge in packaging requirements owing to the rising trend in 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 customer preference for paper as a sustainable and eco-friendly packaging option due to increasing environmental concerns will also act as a key growth driver for the industry.
Companies like Suzano (SUZ - Free Report) , Veritiv Corporation and Clearwater Paper Corporation (CLW - Free Report) are likely to gain from the abovementioned 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 the 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, e-commerce revenues are projected to witness a CAGR of 12.2% to $6.4 trillion by 2027 (from 2022), 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 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. Investment in breakthrough technologies will propel the demand for high-quality paper products.
Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is witnessing rising costs of 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 #18, which places it in the top 7% 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 six months, the industry’s earnings estimates for the current year have been revised 5% 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 outperformed the S&P 500 but lagged the sector over the past year. The stocks in this industry have fallen 21.3%, while the Basic Materials sector has lost 7.5%. The S&P 500 composite has declined 21.9% during this time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 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 6.19X compared with the S&P 500’s 11.41X and the Basic Material sector’s trailing 12-month EV/EBITDA of 7.54X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Over the last five years, the industry has traded as high as 14.95X and as low as 3.92X, with the median being 8.00X.
3 Paper and Related Products Stocks to Bet On
Suzano: The pulp market is witnessing positive demand amid constrained supply that has fueled prices. This favorable backdrop and consistent operational performance with strong sales volume led to a record EBITDA for the Pulp segment in the third quarter of 2022. The paper segment also delivered a record EBITDA, driven by solid demand in all market segments, as well as efforts to drive operational efficiency. In October, SUZ announced the acquisition of KC Brazil’s assets related to the production, marketing, distribution and/or sale of tissue. It also included the ownership of the NEVE brand. The main asset included in the deal is a tissue production plant with an annual production capacity of approximately 130 thousand tons located in the State of São Paulo. The transaction will augment SUZ’s share in the Brazilian tissue market. 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 stock has gained 5% in the past three months.
The Zacks Consensus Estimate for 2022 earnings indicates growth of 186% from the year-ago reported figure. The consensus estimate has moved up 11.5% over the past 90 days. Salvador, Brazil-based integrated pulp and paper producer, SUZ has a trailing four-quarter earnings surprise of 53.8%, on average. The company has a long-term estimated earnings growth rate of 11.2% and currently sports a Zacks Rank #1 (Strong Buy).
Veritiv: Robust packaging sales growth and operational efficiencies across the business continue to benefit the company’s bottom-line performance. The company’s third-quarter 2022 results marked its best performances in net income, earnings per share, adjusted EBITDA and adjusted EBITDA margin in its history. This has been instrumental in the stock’s gain of 18.4% in the past three months. Veritiv’s record low net leverage ratio of 0.6, in combination with a strong free cash flow generation, provides the company significant scope to drive growth. The sale of Veritiv Canada will help VRTV focus on its strategy to invest in high-growth, higher-margin businesses and geographies. Focus on e-commerce and growing sustainable offerings will aid growth.
Earnings estimates for Veritiv’s fiscal 2022 have moved 11% north over the past 90 days. The consensus estimate indicates growth of 161% from the year-earlier tally. Atlanta, GA-based VRTV has a trailing four-quarter earnings surprise of 31.3%, on average. It has a long-term estimated earnings growth of 15.7% and a Zacks Rank #1 currently.
Price & Consensus: VRTV
Clearwater Paper: In paperboard, the company continues to gain on strong consumer demand and improved pricing. The Consumer Products segment is benefiting from higher tissue volumes as consumer demand for a private branded product is on the rise. Also, higher tissue pricing is helping the segment to counter input cost inflation. The Pulp and Paperboard business will gain from the growing sustainable packaging trends. The company’s commitment to reducing debt levels and its prudent capital structure provide ample liquidity. Also, its continued focus on operational execution will drive margins. The CLW stock has appreciated 10% over the past six months.
The Zacks Consensus Estimate for CLW’s 2022 earnings indicates year-over-year growth of 331%. The consensus estimate has moved up 8% over the past 90 days. Spokane, WA-based CLW has a trailing four-quarter earnings surprise of 13%, on average. The company currently carries a Zacks Rank #1.
Price and Consensus: CLW
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3 Paper and Related Products Stocks to Ride the Demand Strength
The Zacks Paper and Related Products industry is poised to gain from the surge in packaging requirements owing to the rising trend in 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 customer preference for paper as a sustainable and eco-friendly packaging option due to increasing environmental concerns will also act as a key growth driver for the industry.
Companies like Suzano (SUZ - Free Report) , Veritiv Corporation and Clearwater Paper Corporation (CLW - Free Report) are likely to gain from the abovementioned 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 the 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, e-commerce revenues are projected to witness a CAGR of 12.2% to $6.4 trillion by 2027 (from 2022), 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 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. Investment in breakthrough technologies will propel the demand for high-quality paper products.
Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is witnessing rising costs of 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 #18, which places it in the top 7% 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 six months, the industry’s earnings estimates for the current year have been revised 5% 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 outperformed the S&P 500 but lagged the sector over the past year. The stocks in this industry have fallen 21.3%, while the Basic Materials sector has lost 7.5%. The S&P 500 composite has declined 21.9% during this time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 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 6.19X compared with the S&P 500’s 11.41X and the Basic Material sector’s trailing 12-month EV/EBITDA of 7.54X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Over the last five years, the industry has traded as high as 14.95X and as low as 3.92X, with the median being 8.00X.
3 Paper and Related Products Stocks to Bet On
Suzano: The pulp market is witnessing positive demand amid constrained supply that has fueled prices. This favorable backdrop and consistent operational performance with strong sales volume led to a record EBITDA for the Pulp segment in the third quarter of 2022. The paper segment also delivered a record EBITDA, driven by solid demand in all market segments, as well as efforts to drive operational efficiency. In October, SUZ announced the acquisition of KC Brazil’s assets related to the production, marketing, distribution and/or sale of tissue. It also included the ownership of the NEVE brand. The main asset included in the deal is a tissue production plant with an annual production capacity of approximately 130 thousand tons located in the State of São Paulo. The transaction will augment SUZ’s share in the Brazilian tissue market. 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 stock has gained 5% in the past three months.
The Zacks Consensus Estimate for 2022 earnings indicates growth of 186% from the year-ago reported figure. The consensus estimate has moved up 11.5% over the past 90 days. Salvador, Brazil-based integrated pulp and paper producer, SUZ has a trailing four-quarter earnings surprise of 53.8%, on average. The company has a long-term estimated earnings growth rate of 11.2% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: SUZ
Veritiv: Robust packaging sales growth and operational efficiencies across the business continue to benefit the company’s bottom-line performance. The company’s third-quarter 2022 results marked its best performances in net income, earnings per share, adjusted EBITDA and adjusted EBITDA margin in its history. This has been instrumental in the stock’s gain of 18.4% in the past three months. Veritiv’s record low net leverage ratio of 0.6, in combination with a strong free cash flow generation, provides the company significant scope to drive growth. The sale of Veritiv Canada will help VRTV focus on its strategy to invest in high-growth, higher-margin businesses and geographies. Focus on e-commerce and growing sustainable offerings will aid growth.
Earnings estimates for Veritiv’s fiscal 2022 have moved 11% north over the past 90 days. The consensus estimate indicates growth of 161% from the year-earlier tally. Atlanta, GA-based VRTV has a trailing four-quarter earnings surprise of 31.3%, on average. It has a long-term estimated earnings growth of 15.7% and a Zacks Rank #1 currently.
Price & Consensus: VRTV
Clearwater Paper: In paperboard, the company continues to gain on strong consumer demand and improved pricing. The Consumer Products segment is benefiting from higher tissue volumes as consumer demand for a private branded product is on the rise. Also, higher tissue pricing is helping the segment to counter input cost inflation. The Pulp and Paperboard business will gain from the growing sustainable packaging trends. The company’s commitment to reducing debt levels and its prudent capital structure provide ample liquidity. Also, its continued focus on operational execution will drive margins. The CLW stock has appreciated 10% over the past six months.
The Zacks Consensus Estimate for CLW’s 2022 earnings indicates year-over-year growth of 331%. The consensus estimate has moved up 8% over the past 90 days. Spokane, WA-based CLW has a trailing four-quarter earnings surprise of 13%, on average. The company currently carries a Zacks Rank #1.
Price and Consensus: CLW