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Dull Near-Term Outlook for Paper & Packaging Industry

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

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

  • 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. Strong demand in these markets drove the industry amid the coronavirus crisis. The e-commerce channel gained utmost importance amid the stay-at-home restrictions imposed by the governments globally to curb the spread of the virus. Packaging plays a crucial role in the e-commerce channel 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. Notable companies in the space including Sealed Air Corporation (SEE - Free Report) , Packaging Corporation of America (PKG - Free Report) and Amcor PLC (AMCR - Free Report) are thus focusing on e-commerce ready packaging to capitalize on this prospect.
     
  • Demand for sophisticated packaging is on the rise and the industry is constantly striving to meet the requirements by adopting new technology and innovative products. It is also likely to benefit from growing global demand for eco-friendly biodegradable packaging materials spurred by environmental concerns. Big players like Amcor 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 pandemic has impacted paper consumption in schools, offices and businesses. Consequently, the packaging companies have idled their paper-mill operations, reducing paper production. The current demand-supply imbalance for paper products is a matter of concern for the industry, which has already been reeling under the unfavorable impact of increased digitization. Parts of the food industry including food service and restaurants have been affected significantly by the pandemic. Other end-markets including general manufacturing, transportation, are facing slowdown or shut downs following government restrictions and a significant reduction in discretionary spending. A decelerating global industrial market adds to woes. The industry has also been facing high raw material costs, and rising transportation and chemical costs. Consequently, the companies have to pass on as much of the raw-material price inflation as possible to customers but it might not always be feasible to do so. As a result, the companies are now focusing on reducing costs and improving productivity to sustain margins.


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 an 11 stock group within the broader Zacks Industrial Products  sector, carries a Zacks Industry Rank #163, which places it at the bottom 35% 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 56%.
 
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 36.5% while the sector fell 3.2%. Meanwhile, the Zacks S&P 500 composite rallied 10.3%.

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 18.77x compared with the S&P 500's 14.17x and the Industrial Products sector's forward 12-month EV/EBITDA of 20.66. 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 16.43x.

Bottom Line

Despite rising costs straining margins, the Containers - Paper And Packaging industry will be supported by resilient demand in few of its end markets amid the coronavirus crisis. Investment in new technology and innovative products and the boom in e-commerce will drive growth in the days ahead.

None of the stocks in the Containers - Paper And Packaging industry currently sport a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). We are suggesting three stocks 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 - Free Report) : This Atlanta, GA-based company carries a Zacks Rank #3. The company has a trailing four-quarter positive earnings surprise of 9.6%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 suggests growth of 10.3%. The estimates for fiscal 2020 earnings have been revised upward by 3% in the past 60 days. The company has an estimated long-term earnings growth rate of 25%.

Price and Consensus: GPK



Amcor: Headquartered in Zürich, Switzerland, the company carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates an improvement of 3.3%. The estimates for earnings for fiscal 2020 have gone up 2% in the past 60 days. The company has a trailing four-quarter positive earnings surprise of 7.15%, on average.

Price and Consensus: AMCR



Berry Global Group, Inc. (BERY - Free Report) : This Evansville, IN-based company is a Zacks Ranked #3 stock. The company beat estimates in each of the trailing four quarters, the average positive surprise being 6.63%. The Zacks Consensus Estimate for earnings for fiscal 2020 suggests growth of 18.8%. The estimates for earnings for fiscal 2020 have gone up 1% over the past 60 days. The company has an estimated long-term earnings growth rate of 10%.

Price and Consensus: BERY



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