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Near-Term Outlook for Paper & Plastic Packaging Industry Grim

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The Zacks Containers - Paper And Packaging  industry comprises companies that manufacture paper and plastic-based packaging products utilized in consumer and industrial end markets. The industry players’ products range from containerboard and corrugated packaging to flexible and rigid plastic packaging.

The industry participants serve a wide array of markets including food, beverage, foodservice and other consumer products like beauty, personal care and home care. The industry also serves the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets.

Let us take a look at the three major themes currently governing the industry:

  • Apart from high raw material costs, the industry has been bearing the brunt of rising transportation, chemical and fuel costs. Consequently, the companies have to pass on as much of the raw-material price inflation as possible to customers. However, it might not always be feasible to pass on the price increase to customers. As a result of which the companies are now focusing on reducing costs, improving productivity and, in turn, increasing profitability.
  • The industry’s considerable exposure (more than 60%) to steady consumer-oriented end-markets, such as food and beverages, and healthcare keeps demand fairly stable across economic cycles. Demand for sophisticated packaging is on the rise and the industry is constantly striving to meet this by adopting new technology and innovative products. It is also likely to gain from capitalizing on growing global demand for eco-friendly biodegradable packaging materials spurred by environmental concerns. Big players like Amcor PLC AMCR are focusing on making packaging recyclable or reusable to encourage eco-friendly and sustainable living worldwide. Moreover, rapid urbanization and rising purchasing power in Asia, particularly China, India, and Southeast Asia, will sustain demand for packaging in the days ahead.
  • The evolution of e-commerce has significantly impacted demand in the industry. Packaging has gained utmost importance as it has to maintain the integrity of the product and be durable enough to withstand the complex automated and manual supply chains involved in delivering the product. According to Statista, global retail e-commerce sales are anticipated to reach $6.54 trillion in 2022 from $3.53 trillion in 2019. In developed markets, e-commerce has become second nature for consumers, while developing countries are catching up. India is one of the fastest growing e-commerce markets and is expected to catapult to $175 billion by 2020 from $39 million in 2017. Notable companies in the space like Sealed Air Corporation SEE, Packaging Corporation of America PKG and Amcor are focusing on ecommerce-ready packaging to capitalize on this growing demand.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all The Containers - Paper And Packaging industry, which is a 14 stock group within the broader Zacks Industrial Products  sector, carries a Zacks Industry Rank #194, which places it at the bottom 24% 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over a year’s time, the industry’s earnings estimate for the current year has gone down 38%.
Despite bleak near-term prospects of the industry, we will present a few Containers - Paper And Packaging stocks that one can retain given their growth prospects. But it’s 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 unperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 28.6% against the sector’s gain of 10.5%. Meanwhile, the Zacks S&P 500 composite rallied 20.9%.

One-Year Price Performance

Containers - Paper And Packaging Industry's Valuation

On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Containers - Paper And Packaging companies, we see that the industry is currently trading at 18.4x compared with the S&P 500's 12.7x and the Industrial Products sector's forward 12-month EV/EBITDA of 17.8. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry has traded as high as 30.08x and as low as 10.98x, with the median being at 16.5x.

Bottom Line

Despite rising costs straining its margins, the Containers - Paper And Packaging industry will be supported by persistent demand growth and investment in new technology and innovative products. The boom in e-commerce will sustain demand in years to come.

None of the stocks in the Containers - Paper And Packaging industry currently sport a Zacks Rank #1 (Strong Buy). We are presenting two stocks with a Zacks Rank #2 (Buy) that investors can bet on and two with  Zacks Rank #3 (Hold) which can be retained.

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

Graphic Packaging Holding Company GPK: This Atlanta, GA-based company carries a Zacks Rank #2. The company beat estimates in the trailing four quarters by 7.76%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 reflects growth of 15%. The estimates for fiscal 2020 earnings have gone up 1% over the past 60 days. The company has an estimated long-term earnings growth rate of 17%.

Price and Consensus: GPK

Berry Global Group, Inc. (BERY - Free Report) : This Evansville, IN-based company is a Zacks Ranked #2 stock. The company beat estimates in the trailing four quarters by 0.26%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 reflects growth of 22.9%. The estimates for earnings for fiscal 2020  have gone up 3% over the past 60 days. The company has an estimated long-term earnings growth rate of 12.5%.

Price and Consensus: BERY

UFP Technologies, Inc. UFPT: The Zacks Consensus Estimate for fiscal 2020 for this Newburyport, MA-based company projects year-over-year growth of 17.6%. The company beat estimates in the trailing four quarters by 17.8%, on average. The stock currently carries a Zacks Rank #3.

Price and Consensus: UFPT

Sonoco Products Company SON: This Hartsville, SC-based company has a Zacks Rank #3 and an estimated long term earnings growth rate of 4.50%.  The company beat estimates in the trailing four quarters by 3.6%, on average. The Zacks Consensus earnings estimate for fiscal 2020 reflects year-over-year growth of 3.1%.

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