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WestRock (WRK) Down 20% in a Year: What's Hurting the Stock?

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WestRock Company’s (WRK - Free Report) shares have declined 19.7% in the past year compared with the industry’s fall of 22.6%. The company is witnessing margin pressure from higher freight, wage and chemicals costs. Additionally, supply chain constraints, labor shortages and logistics disruptions are impairing its ability to meet production targets. These factors are denting the stock’s performance.

Zacks Investment Research
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Factors Ailing the Stock

WestRock anticipates higher freight, wage and chemicals costs through fiscal 2022, which will dent its margins. Labor shortages and supply chain issues have disrupted production and affected customer shipments. This scenario is anticipated to persist and impair the company’s ability to meet the high demand.

The company expects to incur a one-time cost of $450 million due to the closure of the Panama mill. It already recognized $368 million in expenses in the fiscal third quarter and expects to incur the remaining over the next several years. These are likely to affect the company’s EBITDA margin. WestRock has already finished the majority of its planned maintenance for this fiscal. The company had approximately 45,000 tons of scheduled downtime across its system in the fiscal fourth quarter. Additionally, old Corrugated Containers costs are likely to be slightly higher in the fiscal fourth quarter.

The pandemic disrupted demand patterns across a few of WestRock’s businesses. Demand for foodservice was impacted by the closure of restaurants, schools and other services. Commercial print demand bore the brunt of limited public events and reduced retail and direct mail advertising. Even though there has been a recovery lately, the resurgence of COVID-19 cases might put a brake on this trend.

Is Rebound Possible?

WestRock’s corrugated packaging business is poised to gain from growing demand across paperboard grades, improved box shipment, as well as increased demand from distribution, industrial and agricultural customers as the economy gradually recovers. The consumer packaging business is gaining from sustainable fiber-based paper and packaging solutions and demand in food and beverage packaging categories. Strong demand for paper products in domestic and export markets is driving WRK’s paper business. The company’s overall packaging business will gain from solid demand and the implementation of previously announced containerboard and boxboard price increases.

WestRock continues to invest in the business, including strategic capital projects with attractive returns and targeted mergers and acquisitions. It has been witnessing healthy demand for containerboard and corrugated packaging in the Brazilian market. It is well poised to capitalize on this growth with the ramp-up of the Tres Barras mill in the region. The company will reap the benefits of strategic capital projects in its mill and converting systems to improve the overall cost structure. These investments will enhance WestRock’s packaging capabilities in its served markets while reducing exposures to export containerboard and low-margin Specialty solid bleached sulfate businesses.

WestRock successfully started the new state-of-the-art 710,000-ton paper machine at Florence, SC mill, which replaces three old and obsolete machines. This mill is expected to achieve full-production levels at the end of the fiscal fourth quarter. As part of the portfolio-optimization effort, the company announced closing its containerboard and pulp mill in Panama City. The move will save significant capital investment required to operate the mill, which now can be deployed in high-return growth areas. Also, WestRock is reducing exposure to the fluff pulp to focus more on higher-value markets.

On Jul 27, 2022, the company announced its plan to acquire the 67.7% interest in the Grupo Gondi joint venture for $970 million, in addition to the assumption of debt, representing an estimated implied enterprise value of $1.763 billion. This acquisition will provide the company with further geographic and end market diversification while its corrugated and consumer businesses complement WestRock’s existing business and enhance service capabilities within Latin America. Also, increasing integration with Grupo Gondi following the buyout is expected to produce significant synergies in its North American business. The company plans to close the buyout by the end of the first quarter of fiscal 2023.

WestRock currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks worth considering in the basic materials space include Albemarle Corporation (ALB - Free Report) , Daqo New Energy Corp. (DQ - Free Report) and Sociedad Quimica y Minera de Chile S.A. (SQM - Free Report) .

Albemarle has a projected earnings growth rate of 425.7% for the current year. The Zacks Consensus Estimate for ALB's current-year earnings has been revised 67.9% upward in the past 60 days.

Albemarle’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 24.2%, on average. ALB has gained around 25% in a year and currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Daqo New Energy, currently carrying a Zacks Rank #1, has an expected earnings growth rate of 177.5% for the current year. The Zacks Consensus Estimate for DQ's earnings for the current fiscal has been revised 20.8% upward in the past 60 days.

Daqo New Energy’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, the average being 10.8%. DQ has gained around 22% over a year.

Sociedad has a projected earnings growth rate of 517.6% for the current year. The Zacks Consensus Estimate for SQM’s current-year earnings has been revised 33.4% upward in the past 60 days.

Sociedad’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, the average being 28.2%. SQM has rallied roughly 105% in a year. The company carries a Zacks Rank #2 (Buy).

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