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WestRock (WRK) to Gain From KapStone Buyout, Input Costs Rise
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On Nov 15, we issued an updated research report on WestRock Company (WRK - Free Report) . Favorable demand, price and mix trends across paper and packaging businesses, and benefits from the recent acquisition of KapStone Paper and Packaging Corporation is likely to drive growth. However, higher input costs, maintenance downtime, impact of Hurricane Michael, lower pension income, unfavorable foreign currency and higher interest expense may weigh on WestRock’s near-term results.
Weak Q1 Ahead
WestRock projects adjusted segment EBITDA in the first quarter fiscal of 2019 to be between $737 million and $767 million, lower than the $802 million reported in fourth-quarter fiscal 2018. The KapStone acquisition is likely to contribute approximately $90 million in adjusted segment EBITDA. Impact of higher pricing will be offset by lower volumes due to seasonality in the consumer business. A scheduled maintenance downtime across corrugated and consumer mills of 60,000 tons, and two fewer shipping days in the box business is likely to impact EBITDA in the quarter under review. Higher group insurance cost, lower non-cash pension income and lost production from the Hurricane Michael will also dent EBITDA. Moreover, higher depreciation and amortization expenses, higher interest expense, an adjusted tax rate of 24.5% and a slightly higher share count is likely to have a negative impact of 29 cents on first-quarter fiscal 2019 earnings per share.
Poised for Better Fiscal 2019 Despite Higher Costs
For fiscal 2019, the company projects revenues of around $19 billion in fiscal 2019, reflecting year-over-year improvement of 16%. This will be aided by $3.2 billion contribution from KapStone for 11 months, the full-year impact of previously published price increases in both segments, growth in corrugated box volumes, and stable volumes in consumer. Adjusted EBITDA for the fiscal will be around $3.6 billion, up 24% from fiscal 2018 aided by the KapStone acquisition and favorable price volume mix. However cost inflation, higher maintenance downtime, impact of Hurricane Michael, lower pension income and unfavorable foreign currency impact is likely to dent EBITDA margins. Higher D&A and interest expense will impact earnings per share in fiscal 2019. The company expects an adjusted tax rate of 24% to 25% for the fiscal. Adjusted earnings per share are projected at $4.60 compared with $4.09 earned in fiscal 2018.
The Zacks Consensus Estimate for the first quarter fiscal 2019 is currently pegged at 84 cents, reflecting year-over-year dip of 3%. The Zacks Consensus Estimate for fiscal 2019 is $4.71 (15% year-over-year growth) on the back of revenues of $19.43 billion (19% year-over-year growth).
Productivity Improvements Will Aid Results
WestRock was formed by the merger of MeadWestvaco and Rock-Tenn in July 2015. The company achieved its $1 billion target for synergy and performance improvements. Notably, this target was set at the inception of WestRock. This was achieved by the productivity and performance improvement programs across its manufacturing footprint, and cost savings from capital investments. Further, manufacturing optimization and reductions from the elimination of duplicate corporate costs and support functions will aid results.
KapStone Buyout Will Enhance Presence & Product Portfolio
In November, WestRock completed the acquisition of rival KapStone Paper and Packaging Corp. The deal is anticipated to be accretive immediately to WestRock's adjusted earnings and cash flow. It will lead to around $200 million of cost synergies and performance improvements which will be realized by the end of fiscal 2021.
KapStone’s corrugated packaging operations will enhance WestRock’s North American corrugated packaging business. It will help strengthen presence in western United States and compete better in the growing agricultural markets in the region. The company will also be able to broaden portfolio of paper grades, allowing it to capitalize on the kraft bag market with the inclusion of KapStone's complementary specialty kraft paper offerings.
Other Headwinds
The folding carton markets remain challenged by weak primary demand for processed, frozen, and dry foods. This is in line with the ongoing consumer preference for fresh foods and the shrinking center of the supermarket. Moreover, demand for carbonated drinks continues to remain weak, particularly in North America. WestRock operates in the highly cyclical pulp, containerboard and paperboard products industries. Unexpected fluctuations in prices or demand for the company’s products can put pressure on profit margins, lower sales volume, and pose a risk to the company’s estimates.
Over the past year, shares of WestRock have plunged 23%, compared with the industry’s decline of 10%..
Zacks Rank & Stocks to Consider
WestRock currently has a Zacks Rank #3 (Hold) and an impressive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum. The score is a weighted combination of these three scores (Value - B, Growth - A, Momentum - B). Such a score allows you to eliminate the negative aspects of stocks and select winners. The VGM Score of A, along with some other key metrics, makes the company a solid choice for investors.
Some better-ranked stocks in the basic materials space are CF Industries Holdings, Inc. (CF - Free Report) , The Mosaic Company (MOS - Free Report) and KMG Chemicals, Inc. .
CF Industries has an expected long-term earnings growth rate of 6% and a Zacks Rank #1 (Strong Buy). The company’s shares have gained 29% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Mosaic has an expected long-term earnings growth rate of 7% and a Zacks Rank #1. The company’s shares have rallied 61% over a year’s time.
KMG Chemicals has an expected long-term earnings growth rate of 28.5% and a Zacks Rank #2 (Buy). Its shares have risen 47% in the past year.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>
On Nov 15, we issued an updated research report on WestRock Company (WRK - Free Report) . Favorable demand, price and mix trends across paper and packaging businesses, and benefits from the recent acquisition of KapStone Paper and Packaging Corporation is likely to drive growth. However, higher input costs, maintenance downtime, impact of Hurricane Michael, lower pension income, unfavorable foreign currency and higher interest expense may weigh on WestRock’s near-term results.
Weak Q1 Ahead
WestRock projects adjusted segment EBITDA in the first quarter fiscal of 2019 to be between $737 million and $767 million, lower than the $802 million reported in fourth-quarter fiscal 2018. The KapStone acquisition is likely to contribute approximately $90 million in adjusted segment EBITDA. Impact of higher pricing will be offset by lower volumes due to seasonality in the consumer business. A scheduled maintenance downtime across corrugated and consumer mills of 60,000 tons, and two fewer shipping days in the box business is likely to impact EBITDA in the quarter under review.
Higher group insurance cost, lower non-cash pension income and lost production from the Hurricane Michael will also dent EBITDA. Moreover, higher depreciation and amortization expenses, higher interest expense, an adjusted tax rate of 24.5% and a slightly higher share count is likely to have a negative impact of 29 cents on first-quarter fiscal 2019 earnings per share.
Poised for Better Fiscal 2019 Despite Higher Costs
For fiscal 2019, the company projects revenues of around $19 billion in fiscal 2019, reflecting year-over-year improvement of 16%. This will be aided by $3.2 billion contribution from KapStone for 11 months, the full-year impact of previously published price increases in both segments, growth in corrugated box volumes, and stable volumes in consumer. Adjusted EBITDA for the fiscal will be around $3.6 billion, up 24% from fiscal 2018 aided by the KapStone acquisition and favorable price volume mix.
However cost inflation, higher maintenance downtime, impact of Hurricane Michael, lower pension income and unfavorable foreign currency impact is likely to dent EBITDA margins. Higher D&A and interest expense will impact earnings per share in fiscal 2019. The company expects an adjusted tax rate of 24% to 25% for the fiscal. Adjusted earnings per share are projected at $4.60 compared with $4.09 earned in fiscal 2018.
The Zacks Consensus Estimate for the first quarter fiscal 2019 is currently pegged at 84 cents, reflecting year-over-year dip of 3%. The Zacks Consensus Estimate for fiscal 2019 is $4.71 (15% year-over-year growth) on the back of revenues of $19.43 billion (19% year-over-year growth).
Productivity Improvements Will Aid Results
WestRock was formed by the merger of MeadWestvaco and Rock-Tenn in July 2015. The company achieved its $1 billion target for synergy and performance improvements. Notably, this target was set at the inception of WestRock. This was achieved by the productivity and performance improvement programs across its manufacturing footprint, and cost savings from capital investments. Further, manufacturing optimization and reductions from the elimination of duplicate corporate costs and support functions will aid results.
KapStone Buyout Will Enhance Presence & Product Portfolio
In November, WestRock completed the acquisition of rival KapStone Paper and Packaging Corp. The deal is anticipated to be accretive immediately to WestRock's adjusted earnings and cash flow. It will lead to around $200 million of cost synergies and performance improvements which will be realized by the end of fiscal 2021.
KapStone’s corrugated packaging operations will enhance WestRock’s North American corrugated packaging business. It will help strengthen presence in western United States and compete better in the growing agricultural markets in the region. The company will also be able to broaden portfolio of paper grades, allowing it to capitalize on the kraft bag market with the inclusion of KapStone's complementary specialty kraft paper offerings.
Other Headwinds
The folding carton markets remain challenged by weak primary demand for processed, frozen, and dry foods. This is in line with the ongoing consumer preference for fresh foods and the shrinking center of the supermarket. Moreover, demand for carbonated drinks continues to remain weak, particularly in North America. WestRock operates in the highly cyclical pulp, containerboard and paperboard products industries. Unexpected fluctuations in prices or demand for the company’s products can put pressure on profit margins, lower sales volume, and pose a risk to the company’s estimates.
Over the past year, shares of WestRock have plunged 23%, compared with the industry’s decline of 10%..
Zacks Rank & Stocks to Consider
WestRock currently has a Zacks Rank #3 (Hold) and an impressive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum. The score is a weighted combination of these three scores (Value - B, Growth - A, Momentum - B). Such a score allows you to eliminate the negative aspects of stocks and select winners. The VGM Score of A, along with some other key metrics, makes the company a solid choice for investors.
Some better-ranked stocks in the basic materials space are CF Industries Holdings, Inc. (CF - Free Report) , The Mosaic Company (MOS - Free Report) and KMG Chemicals, Inc. .
CF Industries has an expected long-term earnings growth rate of 6% and a Zacks Rank #1 (Strong Buy). The company’s shares have gained 29% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Mosaic has an expected long-term earnings growth rate of 7% and a Zacks Rank #1. The company’s shares have rallied 61% over a year’s time.
KMG Chemicals has an expected long-term earnings growth rate of 28.5% and a Zacks Rank #2 (Buy). Its shares have risen 47% in the past year.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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WestRock (WRK) to Gain From KapStone Buyout, Input Costs Rise