The Zacks Paper and Related Products industry is poised to grow on the booming e-commerce and growing demand for sustainable packaging options amid a shrinking graphic-paper market. Investments in breakthrough technologies are likely to bolster demand for high-quality paper products.
Increased Digitization a Woe
The transition to digital media has been eroding the graphic paper segment by reducing demand for printing, coated and uncoated papers. Paperless communication, increased use of email, lesser print advertising, more electronic billing and fewer catalogs have dented graphic paper demand. Hence, the industry is converting graphic paper mills into packaging paper and specialty paper mills.
Packaging Demand to Aid the Industry
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.
The Paper and Related Products industry is poised to grow on the back of packaging demand in the days ahead, spurred by rising demand for innovative packaging, as well as shifting preference over plastic, owing to environmental concerns. Nowadays, packaging is not only containing and protecting the product, but also includes sustainable packaging solutions to cater to the increasing consumer awareness on environmental issues.
Growing demand of lightweight-packaging materials, environment-friendly boxes and implementation of new innovative technology is likely to fortify the paper and paperboard packaging market. The global paper & paperboard packaging market, which was worth $199 billion in 2018, is expected to reach $264 billion by 2026, at a CAGR of 3.6%. Moreover, increasing demand for hygiene products will fuel growth.
The booming e-commerce market continues to aid the Paper and Related Products industry, by creating positive growth rates for demand of corrugated boxes. Online shopping has become one of the most popular online activities worldwide. Packaging has gained utmost importance as it has to maintain the integrity and durability of a product, such that it can withstand the complex product-delivery process. Per Statista, global retail e-commerce sales are set to grow to $6.54 trillion in 2022 from the $3.53 trillion recorded in 2019. Moreover, improving disposable income, especially in developing countries, is one of the primary catalysts.
Other Growth Drivers
Apart from high raw-material costs, the industry, of late, has been affected by flaring up transportation costs, chemical costs and fuel costs. The companies have to transfer higher costs to customers, but it may not be always feasible, given the heightening competition. Consequently, these companies are now focusing on reducing costs, improving productivity and in turn, boosting profitability.
The paper industry has already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally- and economically-sustainable production methods. Further, investment in breakthrough technologies will spur demand for high-quality paper products. Per Statista, the global market value of paper and paperboard is expected to reach $523.6 billion in 2022.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects for the near term. The Paper and Related Products industry, which is a 16-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #243, which places it at the bottom 4% of 254 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.
The Paper and Related Products industry has underperformed the S&P 500 over the past year. The stocks in this industry have collectively dipped 10.5%, while the Zacks S&P 500 composite has rallied 24.5%. Meanwhile, the Zacks Basic Materials sector rose 1.1%.
However, the valuation looks inexpensive now. On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 11.33x compared with the S&P 500’s 11.99x and the Basic Material sector’s trailing 12-month EV/EBITDA of 9.7x.
Investors keen on the Paper and Related Products industry may consider P. H. Glatfelter Company GLT, Mercer International Inc. MERC, Neenah, Inc. and Veritiv Corporation VRTV. These stocks carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. All these stocks have positive earnings growth estimates for the current year.
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