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Prospects Bright for Paper and Related Products Industry

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The 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, packaging paper to absorbent hygiene products.

Graphic papers, which primarily include printing and writing papers, and newsprint, are utilized for communication purposes. The industry also provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. In addition, it produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products.

The industry participants serve a wide array of industries, ranging from food and beverage, farming and agriculture, home and personal care, health, retail and e-commerce to shipping and transport, among others.

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

  • Paper consumption in schools, offices and businesses has been affected by the coronavirus pandemic, straining demand for the Graphic papers. This has caused the ramping down of a few paper-mill operations, reducing paper production. Hence, the current demand-supply imbalance for paper products is a concern. Moreover, the transition to digital media has been eroding the graphic-paper segment and is a prevalent threat. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs have dented graphic-paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers.
  • The Paper and Related Products industry will be aided by solid packaging demand in the days ahead, spurred by an increasing preference for flexible paper-based packaging over plastic packaging due to environmental concerns. Furthermore, the coronavirus outbreak has fueled demand for food, medicine, medical equipment and other critical products, in turn boosting demand for the industry’s packaging solutions. The global paper and paperboard packaging market, which was worth $199 billion in 2018, is expected to reach $264 billion by 2026 — witnessing a CAGR of 3.6%. The pandemic has fueled e-commerce growth as consumers’ demand for online grocery, beverage and pharmaceuticals delivery services has skyrocketed following the travel restrictions imposed by governments all over. Hence, rising e-commerce activities, and increasing demand for tissue papers and hygiene products will stoke growth. Per Statista, global retail e-commerce sales are set to grow to $6.54 trillion in 2022 from $3.53 trillion in 2019.
  • Apart from high raw-material costs, the industry has been plagued with rising transportation, chemical and fuel costs. Therefore, the industry players are focused on cost reduction and resorting to digital manufacturing for the same. Increasing demand for sustainable packaging options and eco-friendly packaging solutions have been supporting the paper market. 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. Further, investment in breakthrough technologies will propel demand for high-quality paper products.

Zacks Industry Rank Indicates Bright Prospects

The Paper and Related Products industry is a 16-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #77, which places it at the top 30% of the 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. 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.

Before we present a few Paper and Related Products stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s stock-market performance and valuation picture.

Industry Lags S&P 500 and Sector

The Paper and Related Products industry has underperformed the S&P 500 and the sector over the past year. The stocks in this industry have depreciated 34.6% compared with the S&P 500’s 3.7% decline and the Basic Materials sector’s 18.3%.

One-Year Price Performance

Paper and Related Products Industry’s Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 8.60x compared with the S&P 500’s 10.96x and the Basic Material sector’s forward 12-month EV/EBITDA of 4.67x. 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 11.11x and as low as 8.01x, with the median being at 9.66x.

Bottom Line

While increased digitization and lower paper demand due to the coronavirus outbreak are headwinds, rising global demand for paper packaging, tissue papers and hygiene products will support the Paper and Related Products industry. Furthermore, the e-commerce boom will act as a catalyst.

We are presenting four stocks carrying a Zacks Rank #3 (Hold) that are well poised to grow. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Verso Corporation (VRS - Free Report) : The Zacks Consensus Estimate for this Miamisburg, OH-based company’s current-year earnings indicates a year-over-year surge of 626.3%. It has an average positive earnings surprise of 241.4% for the preceding four quarters.

Price & Consensus: VRS

P.H Glatfelter Company : The Zacks Consensus Estimate for this York, PA-based company’s 2020 earnings suggests 14.7% year-over-year growth. The company has beat estimates in the trailing four quarters by 22.05%, on average.

Price & Consensus: GLT

Veritiv Corporation (VRTV - Free Report) : The Zacks Consensus Estimate for this Atlanta, GA-based company's ongoing-year earnings indicates a year-over-year increase of 26.6%.

Price & Consensus: VRTV

Domtar Corporation (UFS - Free Report) : This Fort Mill, SC-based company has an average positive earnings surprise of 35.3% for the preceding four quarters.

Price & Consensus: UFS

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