Yahoo Finance 3 Paper and Related Products Stocks to Buy From a Challenging Industry
The Zacks Paper and Related Products industry has lately been impacted by weak packaging demand as customer spending has been muted due to inflationary pressures. Nevertheless, increasing packaging requirements, owing 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.
Companies like Suzano SUZ, Smurfit Kappa Group plc SMFKY and Veritiv Corporation VRTV are likely to gain from the above-mentioned trends.
Industry Description
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 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, which has further impacted the 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. Industry players are, thus, increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.
Digitization is Hurting 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, 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. The demand, however, 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 11.3% from 2022 to 2027, representing a major growth opportunity for the industry. Brazil is expected to lead in retail e-commerce development with a CAGR of 14.63% over 2023-2027, closely followed by Argentina, Turkey and India with growth of 14.61%, 14.33% and 13.91%, respectively.
Sustainability is the Key: Increasing demand for sustainable packaging options and eco-friendly packaging solutions will support the paper market in the days ahead. 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. Investment in breakthrough technologies will propel the demand for high-quality paper products.
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 #200, which places it in the bottom 20% of the 250 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish 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. So far this year, the industry's earnings estimates for the current year have moved down 6%.
Before we present a few Paper and Related Products stocks that investors can keep an eye on, it is worth looking at the industry’s stock-market performance and valuation picture.
Industry Versus S&P 500 & Sector
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 lost 31.8%, while the Basic Materials sector has fallen 16.6%. The S&P 500 composite has declined 13.9% during this time frame.
One-Year Price Performance
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 10.02X compared with the S&P 500’s 10.83X and the Basic Material sector’s forward 12-month EV/EBITDA of 14.77X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 10.50X and as low as 7.53X, with the median being 9.17X.
3 Paper and Related Products Stocks to Bet on
Suzano: The company delivered solid results in 2022, aided by the upward trend of pulp prices throughout the year, along with strong sales volume. Adjusted EBITDA reached a record despite the ongoing inflationary pressures, mainly due to the global commodity price increases. The paper and packaging business delivered a 50% improvement in EBITDA, driven by price hikes, and surpassed the R$3-billion mark for the first time in a year. The pulp business benefitted from high prices and solid sales volumes. Suzano’s $2.8-billion Cerrado Project has been 45% completed and remains on schedule to commence production in the first quarter of 2024. Once completed, it is expected to boost SUZ’s current pulp production capacity by approximately 20%. It will be the world’s largest plant with a single eucalyptus pulp production line. The stock has gained 0.9% in the past six months.
The Zacks Consensus Estimate for 2023 earnings has moved up 13% over the past 60 days. The Salvador, Brazil-based integrated pulp and paper producer, SUZ, has a trailing four-quarter earnings surprise of 53.8%, on average. The company has a long-term estimated earnings growth rate of 7% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: SUZ
Smurfit Kappa: SMFKY’s results have 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, as well as strategic acquisitions. The Group continued to expand its geographic footprint and product portfolio through acquisitions in 2022. In Europe, it purchased operations in Spain and the U.K., while in the Americas, it acquired corrugated packaging plants in Argentina and Brazil. The demand for its sustainable and innovative packaging solutions remains strong. 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 28% in the past six months.
The Zacks Consensus Estimate for the Dublin, Ireland-based company’s current-year earnings has moved up 17% over the past 60 days. SMFKY has a long-term estimated earnings growth of 7% and a Zacks Rank #2 (Buy) at present.
Price: SMFKY
Veritiv: Robust packaging sales growth and operational efficiencies across the business continue to benefit the company’s bottom-line performance. The company’s fourth-quarter 2022 and 2022 results marked its best performances in net income, earnings per share, adjusted EBITDA and adjusted EBITDA margin in its history. This has been instrumental in the stock’s gain of 29.8% in the past six months. Veritiv’s record-low net leverage ratio of 0.4, in combination with a strong free cash flow generation, provides the company with significant scope to drive growth. The sale of Veritiv Canada will help VRTV focus on its strategy to invest in high-growth, higher-margin businesses and geographies. Focus on e-commerce and growing sustainable offerings will aid growth.
Earnings estimates for Veritiv’s fiscal 2022 have moved 15% north over the past 60 days. Atlanta, GA-based VRTV has a trailing four-quarter earnings surprise of 20.7%, on average. It has a long-term estimated earnings growth of 15.6% and a Zacks Rank #2, currently.
Price: VRTV
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
Veritiv Corporation (VRTV) : Free Stock Analysis Report
Smurfit Kappa (SMFKY) : Free Stock Analysis Report
