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Favorable Demand Aids WestRock (WRK), Input Costs Rise

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On Jan 18, 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 Corp. is likely to drive growth. However, higher input costs, maintenance downtime and impact of Hurricane Michael are likely to weigh on the company’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. In the quarter, contribution from the KapStone acquisition, impact of higher pricing will be offset by lower volumes due to seasonality in the consumer packaging segment.
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 to-be-reported quarter as well. 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.
The Zacks Consensus Estimate for the first quarter fiscal 2019 is currently pegged at 81 cents, reflecting year-over-year dip of 7%.
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 driven 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 packing segment. Adjusted EBITDA for the fiscal will be around $3.6 billion, up 24% from fiscal 2018 backed 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. The company anticipates adjusted earnings per share at $4.60 compared with $4.09 earned in fiscal 2018.
The Zacks Consensus Estimate for fiscal 2019 is pegged at $4.38 (7% year-over-year growth) on the back of revenues of $19.4 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. It was achieved on the back of 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: A Strategic Move 
In November 2018, WestRock completed the acquisition of rival KapStone Paper and Packaging Corp. The deal is anticipated to be accretive immediately to the company’s adjusted earnings and cash flow. It will result in 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. It will also enable WestRock to compete better in the growing agricultural markets in the region. The company will also be able to broaden portfolio of paper grades, enabling it to capitalize on the kraft bag market with the inclusion of KapStone's complementary specialty kraft paper offerings.
Few Headwinds Linger
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.
Moreover, 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 its estimates.
Over the past year, shares of WestRock have plunged 40%, compared with the industry’s decline of 39%.
Zacks Rank & Stocks to Consider
WestRock currently has a Zacks Rank #3 (Hold).
A few better-ranked stocks in the basic materials space are Ingevity Corp. (NGVT - Free Report) , Cameco Corp. (CCJ - Free Report) and Israel Chemicals Ltd. (ICL - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingevity has expected earnings growth rate of 21.5% for 2019. The company’s shares have gained 22% in the past year.
Cameco has expected earnings growth rate of 20% for 2019. Its shares have rallied 23% in a year’s time.
Israel Chemicals has expected earnings growth rate of 5.4% for 2019. Its shares have rallied 33% in a year’s time.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
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