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Packaging Fuels Paper & Related Products Industry: 4 Top Picks

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The Paper And Related Products industry continues to grow despite a shrinking graphic-paper market, thanks to improving demand for paper packaging, tissue paper and hygiene products. In fact, packaging comprises more than half of the world’s paper consumption, and has been increasing consistently in recent years. This demand is likely to sustain the paper and paper products industry in the long haul.
Digitization: A Threat to Graphic Paper
Graphic papers are used for communication purposes which primarily include printing and writing papers and newsprint. The transition to digital media over the past few years has dealt a blow to the graphic paper segment. Preference of electronic media over newsprints and magazines, paperless communication, increased use of email, less print advertising, more electronic billing, fewer catalogs has taken a toll on graphic paper demand, forcing it into a downward spiral. Consequently, the industry is resorting to machine conversions into packaging and specialty papers.
Packaging Demand to the Rescue
The industry is primarily dependent on paper-based packaging, which is utilized in consumer staples, for stability, steady growth and earnings. Almost 60% of all paperboard packaging is used for food product segments as beverages and dairy products, candy and confections, dry foods including cereals, and frozen foods like meats and vegetables. The balance services pharmaceuticals, cosmetics and personal care products.

Growing consumer awareness regarding sustainable packaging, preference over plastic, skyrocketing e-commerce activities and increasing demand for hygiene products will boost demand for paper products growth. Moreover, growing disposable incomes of people, especially in the developing countries is one of the major catalysts. Particularly, Asia Pacific is anticipated to dominate the global market on the back of increasing demand of convenience food, better health and personal care products.
The global paper & paperboard packaging market, which was at $175 billion in 2017, is expected to reach $267 billion by 2026 at a CAGR of 4.8%.
Other Growth Drivers
Apart from rising cost of raw materials, the industry has been affected by higher transportation costs, chemical costs and fuel costs lately. The companies in the industry are focused on cost reduction programs. These companies are now resorting to digital manufacturing, which could further reduce their cost base.
The paper industry has already begun to incorporate recycled content into its production methods. By maximizing recycling, the industry will be better able to support rising standards of living worldwide while implementing environmentally and economically sustainable production methods. It is less energy and water intensive than paper made from wood pulp. Consequently, an efficient and effective industrial recycling infrastructure will drive the industry’s performance.
Further, investment in breakthrough technologies will spur demand for high quality paper products. Moreover, the industry will ride on efforts to boost paper efficiencies, which can bring many knock-on benefits, as light-weight packaging can drive product sales, reduce breakages and cut transport emissions.
Industry Valuation is Inexpensive
The Paper and Related Products Industry, which is an 18-stock group within the broader Basic Materials Sector, has outperformed its own sector over the past year. It has however, underperformed the Zacks S&P 500 composite over the same time frame.
Over this period, the industry has fallen 11.8% compared with the sector’s decline of 12.5%. Meanwhile, the Zacks S&P 500 composite has gained 4.5% in the same time frame.
One-Year Price Performance
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Paper and Related Products Industry currently carries a Zacks Industry Rank #167, 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.
However, the valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its Enterprise Value to Earnings before Interest Depreciation and Amortization (EV/EBITDA). This valuation is a good measure for the industry’s given its complicated and capital-intensive nature.
The industry currently has a trailing 12-month EV/EBITDA ratio of 4.7, which looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 10.5.
A comparison of the industry’s EV/EBITDA ratio with that of its broader sector ensures that the industry is trading at a decent discount. The Zacks Basic Material Sector’s trailing 12-month EV/EBITDA ratio of 5.2 is above the Zacks Paper & Related Products Industry’s ratio of 4.6.
How to Play the Industry?
We suggest a few paper stocks that have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and are witnessing upward estimate revisions. Earnings estimate revisions is the most crucial factor impacting stock prices. Stocks with rising earnings estimates have a tendency to perform better than the other stocks in the group even if the industry fundamentals remain sluggish. We have zeroed in on four such stocks below:
Verso Corporation (VRS - Free Report) The consensus EPS estimate for this Miamisburg, OH-based company has moved 14% upward for the current year over the last 60 days. This Zacks Rank #1 stock has rallied 119% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Domtar Corporation (UFS - Free Report) : The consensus EPS estimate for this Fort Mill, SC-based company has moved 17% upward for the current year over the last 60 days. This stock carries a Zacks Rank #2.
Mondi plc (MONDY - Free Report) : Based in Addlestone, the U.K., the company has witnessed an increase of 4% in earnings estimates over the last 60 days. It carries a Zacks Rank #2.
Svenska Cellulosa Aktiebolaget SCA (SVCBY - Free Report) : The Zacks Consensus Estimate of this Sundsvall, Sweden company has gone up 22% in the last 60 days. The stock currently carries a Zacks Rank #2.
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