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KapStone Paper and Packaging

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Shares of KapStone Paper and Packaging Corporation (KS - Free Report) have been heading higher recently on upbeat prospects for the containerboard sector. This Zacks #1 Rank (Strong Buy) hit its new 52-week high on October 17, and has seen its shares soar roughly 41% year-to-date. The containerboard maker stands to benefit from a strong backlog, better pricing, favorable industry trends and healthy synergies from an acquisition.

Acquisition Helps Q2 Revenue to Soar

KapStone will report third quarter results after the closing bell on October 30. The Zacks Consensus Estimate is at 48 cents per share.

On August 1, KapStone reported second-quarter adjusted earnings of 41 cents per share, missing the Zacks Consensus Estimate of 45 cents.

Revenues cruised higher by 43% year over year to $306.3 million on the back of the contributions from U.S. Corrugated, Inc. (USC), which the company bought last year. KapStone logged record paper production of 390,000 tons in the quarter.

The average selling price decreased $10 from the prior-year quarter to $623 per ton, mainly due to lower export containerboard prices, which have been recovering after declining significantly in March. However, average selling prices increased $15 per ton sequentially on product mix improvements and a recovery of export containerboard prices.

KapStone has a strong balance sheet and healthy cash flows to invest in growth opportunities. The company recently said that it is investing $29 million in its North Charleston, South Carolina, paper mill. The investment is expected to boost the production of Ultra High Performance (UPL) lightweight linerboard. The company also announced a price hike (of $50 per ton) in July, which is expected to drive its third quarter results.

Earnings Momentum Rising

The Zacks Consensus Estimate for 2012 has moved upward by roughly 2% in the last 30 days to $1.62 per share, as 3 of 5 estimates headed higher. This indicates an estimated annualized growth of roughly 19%.

The Zacks Consensus Estimate for 2013 jumped nearly 14% in the same timeframe to $2.15 on 5 upward revisions out of 6 total estimates. This outlook suggests year-over-year growth of roughly 33%.

Reasonable Valuation

KapStone is currently trading at a modest premium on a P/E basis. It is currently trading at a forward P/E of 14.20x, a roughly 0.8% premium to the peer group average of 14.09x. Moreover, its trailing twelve months P/E of 16.41x is a bit higher than the peer group average of 15.99x. The valuation looks reasonable considering the company’s healthy earnings trajectory. KapStone has a 1-year ROE of 12.2%, higher than its peer group average of 9.9%, reflecting efficient capital deployment.

Sound Technicals and Healthy Performance

Technical indicators show that KapStone has been trading above its 50-day moving average since July 2012 and its 200-day moving average since August 2012. Following a golden crossover in September 2012, the 50-day moving average is currently reading higher than the 200-day moving average, signaling the bullish trend.

On the performance front, KapStone has outperformed the S&P 500 over the past year and has delivered a year-to-date return of roughly 46% versus 18% for the benchmark.

Founded in 2005, KapStone Paper and Packaging Corporation is a leading producer of unbleached kraft paper and corrugated products. It is the parent company of KapStone Kraft Paper Corporation and KapStone Container Corporation, and operates three paper mills and 14 converting plants across the U.S. The company, which has a market cap of roughly $1.1 billion, offers a range of products, including containerboard, kraft paper and unbleached folding carton board products.

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