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Of late, the Zacks Paper and Related Products industry has been impacted by weak packaging demand, as customer spending has been muted due to inflationary pressures. Nevertheless, increasing packaging requirements due to the rising trend in e-commerce activities and steady demand from consumer-oriented end markets, such as food and beverages and healthcare, will support the industry. The growing preference for paper as a sustainable and eco-friendly packaging option due to environmental concerns will act as a key driver for the industry.
Players like International Paper Co., Smurfit Kappa Group plc, WestRock Co. and Sappi are likely to gain from the above-mentioned trends.
About the Industry
The Zacks 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 and packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers, and newsprint, are utilized for communication purposes.
The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps utilized in absorbent hygiene products, tissues and paper products. The industry caters to a wide array of industries, including food and beverage, farming, home and personal care, health, retail, e-commerce and transport. The industry players meet customers' shipping, storage and display requirements with sustainable solutions.
Major Trends Shaping the Future of the Paper and Related Products Industry
Low Consumer Spending, High Costs Are Near-Term Woes: The current inflationary pressures have been impacting consumers, leading to a lower demand for goods. This has impacted packaging demand as consumer priorities have shifted toward non-discretionary goods and services. Customers have been trying to lower their elevated inventories, impacting packaging demand.
The companies in the industry had to cut down production levels to align with customer demand. Moreover, the industry is witnessing rising costs of transportation, chemical and fuel, and supply-chain headwinds. Thus, industry players are increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.
Digitization Hurts Paper Demand: The transition to digital media has been eroding the graphic paper market for some time now. The same remains a persistent threat to the industry. Paperless communication, the increased use of email, less print advertising, more electronic billing and fewer catalogs dented graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses took a hit from the pandemic-led shutdowns. However, the demand picked up on the reopening of schools and offices.
E-commerce & Consumer Products to Support Packaging Demand: The industry's considerable exposure to consumer-oriented end markets, including food and beverages, and healthcare, ensures steady growth in earnings. With e-commerce, packaging gained the utmost importance as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product.
Per Statista, global e-commerce revenues are projected to witness a CAGR of 11.2% from 2023 to 2027, representing a major growth opportunity for the industry. In 2022, e-commerce accounted for nearly 19% of retail sales worldwide and is expected to be 25 by 2027. India is expected to lead retail e-commerce development, seeing a CAGR of 14.11% between 2023 and 2027, closely followed by Brazil, Argentina and Turkey, with growth of 14.07%, 13.63% and 13.57%, respectively.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #236, which places it in the bottom 5% of the 249 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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. Year to date, the industry's earnings estimates for 2023 have moved down 13%, and the same for 2024 has declined 35%.
Before we present a few Paper and Related Products stocks that investors can consider, it is worth looking at the industry's stock-market performance and valuation picture.
Industry Versus Broader Market
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 dropped 3.7%, while the Basic Materials sector has risen 16.4%. The S&P 500 composite has grown 15.6% during this time frame.
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 9.9X compared with the S&P 500's 11.32X and the Basic Material sector's forward 12-month EV/EBITDA of 7.01X.
Over the last five years, the industry has traded as high as 11.55X and as low as 5.00X, with the median being 9.50X.
4 Paper and Related Products Stocks to Consider
International Paper: The company is adding capacity to its existing plants and investing in new plants that will help it capitalize on the demand for corrugated and containerboard packaging, going forward. This will aid the Industrial Paper segment's results. The Global cellulose fibers segment will benefit from a favorable supply-demand backdrop for fluff pulp. International Paper achieved $250 million in earnings through the Building a Better IP initiatives in 2022, exceeding the target of $200-$225 million.
The company realized $120 million of a year-over-year incremental earnings improvement in the first half of 2023. It expects the total contribution to be $125-$150 million in 2023. The same target is projected for 2024. Its efforts to reduce debt levels appear encouraging. Mergers and acquisitions are the key strategies for IP to strengthen its packaging business. The stock has gained 16.2% over the past three months.
This Memphis, TN-based entity has a trailing four-quarter earnings surprise of 14.4%, on average. International Paper currently carries a Zacks Rank #3 (Hold).
Smurfit Kappa: The company has been benefiting from its focus on bringing innovative and sustainable paper-based packaging to the market and customer-focused investments undertaken over the past few years. SMFKY has been expanding its geographic footprint and product portfolio through acquisitions. In July 2023, SMFKY expanded its geographic reach with the opening of a new integrated, state-of-the-art plant in Morocco and the acquisition of a specialty packaging operation in Spain.
With net debt to EBITDA at 1.4X and no significant debt maturities until 2026, its balance sheet continues to provide financial flexibility. The company has also been investing in the latest high-tech and energy-efficient machinery, which will boost production, while reducing its environmental footprint, and expanding its range of high-value, innovative and sustainable packaging solution offerings. The company's shares have gained 11.7% in the past three months.
The Dublin, Ireland-based company has a long-term estimated earnings growth of 6.3%. The Zacks Consensus Estimate for fiscal 2023 earnings has moved up 5% over the past 60 days. The company currently carries a Zacks Rank #3.
WestRock: The company's consumer business has been robust, with strong growth in beverage, healthcare, and retail and food. WestRock will benefit from solid demand for corrugated packaging, containerboard, food and beverage consumer packaging, and industrial packaging, going forward. The company's overall packaging business is gaining from strong demand, and the implementation of containerboard and boxboard price increases.
Its pricing actions and productivity initiatives will aid earnings. It is also focused on developing sustainable packaging solutions that will drive growth. WestRock has been investing in businesses, including strategic capital projects that have attractive returns, and targeted mergers and acquisitions. The company's shares have gained 14.9% in the past three months.
Earnings estimates for WestRock's fiscal 2023 have moved 17% north over the past 60 days. Atlanta, GA-based WRK has a trailing four-quarter earnings surprise of 30.7%, on average. The company has a Zacks Rank #3 at present.
Sappi: The demand for dissolving pulp has been positive, supported by sustained high operating rates for viscose staple fiber and a recovery in pricing for alternative textile fibers, such as cotton. The company's liquidity is healthy. It is diligently managing working capital through production curtailments, and aligning its product and market mix to match demand.
The company is progressing well in its Thrive25 strategic program. This entails focusing on growing its dissolving pulp capacity, expanding packaging and specialty papers in all regions, and reducing exposure to the graphic paper markets. SPPJY is also focusing on maintaining financial health and progressing toward attaining a net debt target of $1 billion. It is striving to drive operational excellence by improving its cost position and production efficiencies. The company's shares have declined 10.8% in the past three months but are expected to trend up, backed by the above-mentioned tailwinds.
Johannesburg, South Africa-based Sappi has a trailing four-quarter earnings surprise of 31%, on average. The company currently carries a Zacks Rank #3.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights International Paper, Smurfit Kappa Group, WestRock and Sappi
For Immediate Release
Chicago, IL – September 6, 2023 – Today, Zacks Equity Research discusses International Paper Co. (IP - Free Report) , Smurfit Kappa Group plc (SMFKY - Free Report) , WestRock Co. (WRK - Free Report) and Sappi (SPPJY - Free Report) .
Industry: Paper Products
Link: https://www.zacks.com/commentary/2144879/4-paper-and-related-products-stocks-countering-industry-headwinds
Of late, the Zacks Paper and Related Products industry has been impacted by weak packaging demand, as customer spending has been muted due to inflationary pressures. Nevertheless, increasing packaging requirements due to the rising trend in e-commerce activities and steady demand from consumer-oriented end markets, such as food and beverages and healthcare, will support the industry. The growing preference for paper as a sustainable and eco-friendly packaging option due to environmental concerns will act as a key driver for the industry.
Players like International Paper Co., Smurfit Kappa Group plc, WestRock Co. and Sappi are likely to gain from the above-mentioned trends.
About the Industry
The Zacks 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 and packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers, and newsprint, are utilized for communication purposes.
The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps utilized in absorbent hygiene products, tissues and paper products. The industry caters to a wide array of industries, including food and beverage, farming, home and personal care, health, retail, e-commerce and transport. The industry players meet customers' shipping, storage and display requirements with sustainable solutions.
Major Trends Shaping the Future of the Paper and Related Products Industry
Low Consumer Spending, High Costs Are Near-Term Woes: The current inflationary pressures have been impacting consumers, leading to a lower demand for goods. This has impacted packaging demand as consumer priorities have shifted toward non-discretionary goods and services. Customers have been trying to lower their elevated inventories, impacting packaging demand.
The companies in the industry had to cut down production levels to align with customer demand. Moreover, the industry is witnessing rising costs of transportation, chemical and fuel, and supply-chain headwinds. Thus, industry players are increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.
Digitization Hurts Paper Demand: The transition to digital media has been eroding the graphic paper market for some time now. The same remains a persistent threat to the industry. Paperless communication, the increased use of email, less print advertising, more electronic billing and fewer catalogs dented graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses took a hit from the pandemic-led shutdowns. However, the demand picked up on the reopening of schools and offices.
E-commerce & Consumer Products to Support Packaging Demand: The industry's considerable exposure to consumer-oriented end markets, including food and beverages, and healthcare, ensures steady growth in earnings. With e-commerce, packaging gained the utmost importance as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product.
Per Statista, global e-commerce revenues are projected to witness a CAGR of 11.2% from 2023 to 2027, representing a major growth opportunity for the industry. In 2022, e-commerce accounted for nearly 19% of retail sales worldwide and is expected to be 25 by 2027. India is expected to lead retail e-commerce development, seeing a CAGR of 14.11% between 2023 and 2027, closely followed by Brazil, Argentina and Turkey, with growth of 14.07%, 13.63% and 13.57%, respectively.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #236, which places it in the bottom 5% of the 249 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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. Year to date, the industry's earnings estimates for 2023 have moved down 13%, and the same for 2024 has declined 35%.
Before we present a few Paper and Related Products stocks that investors can consider, it is worth looking at the industry's stock-market performance and valuation picture.
Industry Versus Broader Market
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 dropped 3.7%, while the Basic Materials sector has risen 16.4%. The S&P 500 composite has grown 15.6% during this time frame.
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 9.9X compared with the S&P 500's 11.32X and the Basic Material sector's forward 12-month EV/EBITDA of 7.01X.
Over the last five years, the industry has traded as high as 11.55X and as low as 5.00X, with the median being 9.50X.
4 Paper and Related Products Stocks to Consider
International Paper: The company is adding capacity to its existing plants and investing in new plants that will help it capitalize on the demand for corrugated and containerboard packaging, going forward. This will aid the Industrial Paper segment's results. The Global cellulose fibers segment will benefit from a favorable supply-demand backdrop for fluff pulp. International Paper achieved $250 million in earnings through the Building a Better IP initiatives in 2022, exceeding the target of $200-$225 million.
The company realized $120 million of a year-over-year incremental earnings improvement in the first half of 2023. It expects the total contribution to be $125-$150 million in 2023. The same target is projected for 2024. Its efforts to reduce debt levels appear encouraging. Mergers and acquisitions are the key strategies for IP to strengthen its packaging business. The stock has gained 16.2% over the past three months.
This Memphis, TN-based entity has a trailing four-quarter earnings surprise of 14.4%, on average. International Paper currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Smurfit Kappa: The company has been benefiting from its focus on bringing innovative and sustainable paper-based packaging to the market and customer-focused investments undertaken over the past few years. SMFKY has been expanding its geographic footprint and product portfolio through acquisitions. In July 2023, SMFKY expanded its geographic reach with the opening of a new integrated, state-of-the-art plant in Morocco and the acquisition of a specialty packaging operation in Spain.
With net debt to EBITDA at 1.4X and no significant debt maturities until 2026, its balance sheet continues to provide financial flexibility. The company has also been investing in the latest high-tech and energy-efficient machinery, which will boost production, while reducing its environmental footprint, and expanding its range of high-value, innovative and sustainable packaging solution offerings. The company's shares have gained 11.7% in the past three months.
The Dublin, Ireland-based company has a long-term estimated earnings growth of 6.3%. The Zacks Consensus Estimate for fiscal 2023 earnings has moved up 5% over the past 60 days. The company currently carries a Zacks Rank #3.
WestRock: The company's consumer business has been robust, with strong growth in beverage, healthcare, and retail and food. WestRock will benefit from solid demand for corrugated packaging, containerboard, food and beverage consumer packaging, and industrial packaging, going forward. The company's overall packaging business is gaining from strong demand, and the implementation of containerboard and boxboard price increases.
Its pricing actions and productivity initiatives will aid earnings. It is also focused on developing sustainable packaging solutions that will drive growth. WestRock has been investing in businesses, including strategic capital projects that have attractive returns, and targeted mergers and acquisitions. The company's shares have gained 14.9% in the past three months.
Earnings estimates for WestRock's fiscal 2023 have moved 17% north over the past 60 days. Atlanta, GA-based WRK has a trailing four-quarter earnings surprise of 30.7%, on average. The company has a Zacks Rank #3 at present.
Sappi: The demand for dissolving pulp has been positive, supported by sustained high operating rates for viscose staple fiber and a recovery in pricing for alternative textile fibers, such as cotton. The company's liquidity is healthy. It is diligently managing working capital through production curtailments, and aligning its product and market mix to match demand.
The company is progressing well in its Thrive25 strategic program. This entails focusing on growing its dissolving pulp capacity, expanding packaging and specialty papers in all regions, and reducing exposure to the graphic paper markets. SPPJY is also focusing on maintaining financial health and progressing toward attaining a net debt target of $1 billion. It is striving to drive operational excellence by improving its cost position and production efficiencies. The company's shares have declined 10.8% in the past three months but are expected to trend up, backed by the above-mentioned tailwinds.
Johannesburg, South Africa-based Sappi has a trailing four-quarter earnings surprise of 31%, on average. The company currently carries a Zacks Rank #3.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.