Back to top

Image: Shutterstock

4 Packaging Stocks Poised to Counter Industry Challenges

Read MoreHide Full Article

The Zacks Containers -  Paper and Packaging industry has been facing weak demand due to lower consumer spending amid an inflationary backdrop and high interest rates. Nevertheless, the industry will get support from rising e-commerce activities, and solid demand for sustainable and eco-friendly packaging options due to increasing environmental concerns. Pricing actions implemented by the industry players will help offset the impacts of the ongoing supply-chain disruptions and elevated costs.

Despite the odds, Packaging Corporation of America (PKG - Free Report) , AptarGroup (ATR - Free Report) , Greif, Inc. (GEF - Free Report) and Karat Packaging (KRT - Free Report) are set to gain from these trends.

About the Industry

The Zacks Containers - Paper and Packaging industry comprises companies that manufacture paper and plastic packaging products. The packaging solutions provided by the industry help protect and preserve products, extend the shelf life, and cut down on wastage and loss across the wide and lengthy range of distribution channels. The products range from containerboard and corrugated packaging to flexible and rigid plastic packaging. Some companies manufacture dispensing pumps, closures, aerosol valves and applicators for the beauty, personal, home care and healthcare markets. The industry serves a wide array of markets, including food, beverage, food services and other consumer products, such as beauty, personal care and home care. They also cater to the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets, to name a few.

What's Shaping the Future of the Containers - Paper and Packaging Industry

High Costs & Supply-Chain Woes Remain Challenging: Industry participants continue encountering supply-chain disruptions and higher raw material costs from factors like general inflationary pressure, limited availability of certain raw materials and global transportation disruptions. Higher labor, transportation and chemical costs aggravated their woes. The shortage of labor impacted production levels and impaired their ability to meet high demand. The companies have been implementing cost-reduction actions for a while, which are likely to sustain margins. Industry players focus on streamlining their operations and realigning with high-growth key markets to bolster their performances. Some companies recently witnessed declines in volumes due to lower consumer spending on goods, given the inflationary scenario. However, this is a temporary setback as volumes will eventually pick up as these pressures subside. Also, supply-chain issues are gradually showing signs of easing.

E-commerce Acts as a Key Catalyst: With rising e-commerce activities over the past few years and the pandemic accelerating it further, the importance of packaging has increased manifold as it maintains the integrity and durability of a product. Packaging also helps withstand the complex product delivery process. Per Statista, revenues in the eCommerce market are projected to reach $3.64 trillion in 2023. Revenues are expected to grow, seeing a CAGR of 11.2% to $5.56 trillion by 2027. In 2021, e-commerce accounted for nearly 19% of global retail sales. By 2026, online sales is anticipated to be 25% of the total global retail sales. This, in turn, will fuel the Containers - Paper and Packaging industry. The industry has significant exposure (more than 60%) to consumer-oriented end markets, such as food and beverages and healthcare, keeping the demand for packaging applications fairly stable across economic cycles.

Demand for Eco-Friendly Packaging to Aid Industry: The preference for environmentally friendly biodegradable packaging materials is witnessing a steady rise globally, courtesy of customers’ increasing awareness of environmental issues. The industry is constantly striving to meet the same by adopting the latest technology and bringing innovative products. Industry players have begun incorporating recycled content into production methods. By maximizing recycling, the industry can implement environmentally and economically sustainable production methods.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Containers - Paper and Packaging industry is a 10-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #187, which places it at the bottom 24% of the 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Year to date, the industry's earnings estimates for 2023 have moved down 7%, and the same for 2024 has declined 10%.

Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Versus Broader Market

The Containers - Paper and Packaging industry has underperformed the S&P 500 and the sector over the past year. The industry has gained 8.2% compared with the S&P 500’s growth of 20.3%. The Industrial Products sector has meanwhile gained 25.7%.

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 Containers - Paper and Packaging companies, we see that the industry is currently trading at 17.26X compared with the S&P 500’s 10.79X and the Industrial Products sector’s forward 12-month EV/EBITDA of 13.68X. 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 traded as high as 30.07X and as low as 10.95X, the median being 18.38X.

4 Containers - Paper and Packaging Stocks to Keep an Eye on

Karat Packaging: The company will gain from its efforts to increase its market share, and robust demand for its eco-friendly products and other offerings. With growing pressure on countries across the globe to implement regulations to ban Styrofoam and single-use plastic, the company is poised well to capitalize on increased demand for compostable products. KRT is implementing initiatives to significantly boost online sales. It is also expanding its distribution network. Shift to higher-margin products, such as environmentally friendly products, will boost its margins. The growing preference for food delivery, take-out and at-home dining is another key catalyst. The company’s shares have gained 37% in a year.
The Zacks Consensus Estimate for Karat Packaging’s 2023 earnings suggests growth of 40.8% from the last year’s reported figure. The estimate has moved up 28% over the past 30 days. KRT has a trailing four-quarter earnings surprise of 48.8%, on average. The Chino, CA-based company has a Zacks Rank #1 (Strong Buy) at present.

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

Price & Consensus: KRT

AptarGroup: The company’s Beauty segment will continue to gain from increased demand for beauty and personal care markets. The Pharma segment is witnessing steady demand growth for prescription and consumer healthcare. Given the ongoing sales momentum in elastomer components and active material solutions, AptarGroup is expanding its capacity to produce elastomer components for injected medicines and active material science solutions, which will drive near-term growth. The company has embarked on a business transformation plan that will drive top-line growth, boost operational excellence, enhance its approach to innovation and improve organizational effectiveness. Backed by its efforts to bring products into the market, the company remains the preferred choice for renowned brands worldwide. Focus on acquisitions to expand the scope of technologies, geographic presence and product offerings will also aid growth. ATR shares have gained 32% over the past year.

The Zacks Consensus Estimate for AptarGroup’s fiscal 2023 earnings has moved 7.6% north in the past 60 days. The figure indicates year-over-year growth of 20.1%. This Crystal Lake, IL-based company has a trailing four-quarter earnings surprise of 8.6%, on average. The stock estimated a long-term growth rate of 7% and has a Zacks Rank #2 (Buy) at present.

Price & Consensus: ATR

Packaging Corp: The company’s packaging business, which accounts for around 91% of its revenues, is poised to gain from strong demand in e-commerce and stable demand for the packaging of meat, fruit and vegetables, processed food, beverages, and medicines. The conversion of the No. 3 paper machine at its Jackson, AL-based mill to linerboard in a phased manner over the next three years will help it meet the strong packaging demand. The company maintains a balanced approach toward capital allocation to boost growth and maximize returns for shareholders. PKG shares have gained 37% in a year.

The Zacks Consensus Estimate for Packaging Corp’s ongoing year’s earnings has been revised upward by 1.5% in the past 60 days. PKG has a trailing four-quarter earnings surprise of 5.1%, on average. The Lake Forest, IL-based company has an estimated long-term earnings growth rate of 5%. The company currently carries a Zacks Rank #3 (Hold).

Price & Consensus: PKG

Greif: The company recently acquired a 51% ownership interest in ColePak, a manufacturer of bulk and specialty partitions made from containerboard and uncoated recycled board serving a broad range of applications in food, beverage and other markets. This provides a unique and margin-accretive converting capability to Greif’s Paper Packaging & Services segment. It also offers incremental integration benefits to its containerboard and uncoated recycled board mills. The company will continue to deploy capital toward value-accretive targets in the coming quarters. Greif has been implementing cost rationalization measures within its system, which have been aiding its earnings performance. GEF shares have gained 14% in the past year.

The Zacks Consensus Estimate for Greif’s 2023 earnings has been revised 1% upward over the past 60 days. Greif has a trailing four-quarter earnings surprise of 6%, on average. The Delaware, OH-based player has an estimated long-term earnings growth rate of 10% and currently carries a Zacks Rank #3. 

Price & Consensus: GEF

Published in