Chicago, IL – July 22, 2022 – Today, Zacks Equity Research discusses Packaging Corp. of America PKG, Sealed Air Corp. SEE, Graphic Packaging Holding Co. GPK, Sonoco Products Co. SON and Greif, Inc. GEF.
Industry: Packaging
Link: https://www.zacks.com/commentary/1955853/5-stocks-to-watch-as-packaging-industry-shows-promise
The Zacks Containers – Paper and Packaging industry will continue to benefit from solid demand stemming from consumer-oriented end-markets, as packaging is integral to the distribution of products. Booming e-commerce activities and rising demand for sustainable and eco-friendly packaging options due to increasing environmental concerns will favor the industry. Pricing actions implemented by the industry players will help offset the impact of the ongoing supply chain disruptions and rising costs.
The Zacks Containers – Paper and Packaging industry comprises companies that manufacture paper and plastic packaging products. The packaging solutions provided by the industry help protect and preserve products while also extending shelf life and cutting down wastage and loss across the wide and lengthy range of distribution channels.
The products range from containerboard and corrugated packaging to flexible and rigid plastic packaging. Some companies manufacture dispensing pumps, closures, aerosol valves and applicators for the beauty, personal, home care and healthcare markets.
The industry serves a wide array of markets, including food, beverage, food services and other consumer products, such as beauty, personal care and home care. They also cater to the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets, to name a few.
E-commerce Remains a Key Catalyst: With rising e-commerce activities over the past few years and the pandemic accelerating it further, the importance of packaging has increased manifold as it helps maintain the integrity and durability of a product to withstand the complex product-delivery process. Per Statista, global retail e-commerce sales, which were around approximately $4.9 trillion in 2021, are expected to surge 51% to around $7.4 trillion by 2025.
This, in turn, will fuel the Containers - Paper and Packaging industry. The industry has significant exposure (more than 60%) to consumer-oriented end markets, such as food and beverages and healthcare, which keeps demand for packaging applications fairly stable across economic cycles.
Focus on Eco-Friendly Packaging: Demand for environment-friendly biodegradable packaging materials has been on the rise globally, courtesy of customers' increasing awareness about environmental issues. The industry has constantly been striving to meet the same by adopting new technology and bringing innovative products. Industry players have already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally and economically sustainable production methods.
High Costs & Supply Chain Woes Remain: The industry participants have been encountering supply chain disruptions and higher raw material costs, which have been stemming from various factors, including general inflationary pressure, limited availability of certain raw materials, and global transportation disruptions. Higher labor, transportation and chemical costs aggravated their woes.
Shortage of labor might impact their production levels and impair their ability to meet the high demand. The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability.
The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario. They are focused on streamlining their operations and realigning around high-growth key markets to bolster their performances.
The Zacks Containers - Paper and Packaging industry is a 10-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #100, which places it at the top 40% of the 252 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of a solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group's earnings growth potential. So far this year, the industry's earnings estimates for the current year have been revised upward by 10%.
Before we present a few Containers - Paper and Packaging stocks that can be retained in one's portfolio, it's worth taking a look at the industry's stock-market performance and valuation picture.
The Containers - Paper and Packaging industry has outperformed the S&P 500 and the sector over the past year. The industry has gained 2.8% against the S&P 500's decline of 17.3%. Meanwhile, the Industrial Products sector has slumped 21.6%.
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Containers - Paper and Packaging companies, we see that the industry is currently trading at 17.03x compared with the S&P 500's 17.28x and the Industrial Products sector's forward 12-month EV/EBITDA of 18.89x.
Over the last five years, the industry has traded as high as 30.06x and as low as 10.95x, with the median at 16.74x.
Greif: The company's Global Industrial Packaging segment has been gaining from strong key end markets. It has been witnessing year-over-year higher volume growth for global large plastic drums and Intermediate Bulk Container ("IBC"), backed by the strategic growth investments in the United States and EMEA, and ongoing recovery in the industrial-end markets.
The Paper Packaging segment has been benefiting from strong volumes in converting operations and higher selling prices due to an increase in published containerboard and boxboard prices. Strong demand and pricing increases are likely to boost fiscal 2022 results.
Backed by these trends, the company's shares have rallied 13% over the past month. GEF continues to invest in the business, return excess cash to shareholders through an attractive and growing dividend, and de-lever its balance sheet, which is commendable.
The Zacks Consensus Estimate for Greif's 2022 earnings has been revised upward by 18% over the past 90 days. The earnings estimate for the year suggests year-over-year growth of 37%. It has a trailing four-quarter earnings surprise of 7.7%, on average. The Delaware, OH-based company has an estimated long-term earnings growth rate of 10% and a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
Graphic Packaging: The company has been capturing new business opportunities supported by consumer preference for sustainable, fiber-based packaging solutions. Innovation and more circular consumer packaging solutions are consistently driving its organic sales growth. The company's shares have appreciated 8% in the past month.
The integration of its recently expanded European platform continues and is on track to deliver synergies worth $40 million over three years. It has begun operating the new K2 Coated Recycled Paperboard ("CRB") machine in Kalamazoo, MI. It will provide significant improvements in water and energy usage and enable GPL to be the lowest-cost producer of the high-quality coated recycled board in North America.
It is expected to contribute $50 million in incremental EBITDA this year and $130 million in incremental EBITDA over three years. The company has been executing price actions that have helped in offsetting commodity input cost inflation.
The Zacks Consensus Estimate for Atlanta, GA-based company's fiscal 2022 earnings has moved up 6.5% over the past 90 days. The figure indicates year-over-year growth of 86.8%. The company has an estimated long-term earnings growth rate of 25% and a Zacks Rank #2 (Buy).
Sonoco: The company's consumer packaging businesses are primarily benefiting from the Metal Packaging acquisition. The segment's flexible packaging business is gaining from strong demand for confectionery, food service and other food products. Plastic food packaging reflects higher demand in the fresh and prepared food markets.
Demand for Industrial Paper Packaging products has returned to pre-pandemic levels in most of the global markets. The company's industrial-served markets will gain from strong demand for global tubes, cores and cones. Its focus on optimizing businesses through productivity improvement, standardization and cost control will drive results in the near term.
It is focused on increasing investment in its core consumer and industrial businesses and achieving an annual EBITDA of $1 billion by 2026. The company's shares have appreciated 9% over the past month.
The Zacks Consensus Estimate for Sonoco's fiscal 2022 earnings has moved north by 16.5% in the past 90 days. The figure indicates year-on-year growth of 63%. The Hartsville, SC-based company has a trailing four-quarter earnings surprise of 1.9%, on average. The company currently has a Zacks Rank #2 and an estimated long-term growth of 5%.
Packaging Corporation of America: The company's packaging business, which accounts for around 91% of its revenues, has been benefiting from strong demand in e-commerce and rising requirements for the packaging of meat, fruit and vegetables, processed food, beverages and medicines. Both containerboard and corrugated products demand remain strong across most of the company's end markets. Its shares have gained 2% in the past month.
The company maintains a balanced approach toward capital allocation to boost growth and maximize returns for shareholders. The conversion of the No. 3 paper machine at its Jackson, AL mill to linerboard in a phased manner over the next three years will help it meet the strong packaging demand.
The Zacks Consensus Estimate for Packaging Corporation's ongoing-year earnings has been revised upward by 6% in the past 90 days. The consensus mark indicates year-over-year growth of 23.6%. PKG has a trailing four-quarter earnings surprise of 19.6%, on average. The Lake Forest, IL-based company has an estimated long-term earnings growth rate of 5%. The company currently carries a Zacks Rank #3 (Hold).
Sealed Air: Strong demand for automated equipment and sustainable packaging solutions and a rebound in food service are likely to drive the company's top-line performance. In food, the retail channel and protein exports are expected to remain strong. Its protein automation pipeline continues to grow across all regions. Volume growth, pricing, and productivity gains from the SEE operating engine are expected to benefit earnings.
SEE continues to capitalize on global e-commerce growth and increased demand for recyclable materials, fiber-based solutions and automated packaging. Apart from this, it is likely to benefit from acquisitions, cost reductions, driving operational excellence and new innovations. Its shares have increased 1% over the past month.
The Zacks Consensus Estimate for Sealed Air's 2022 earnings has been revised upward by 0.2% over the past 90 days. It has a trailing four-quarter earnings surprise of 5.9%, on average. The Charlotte, NC-based company has a Zacks Rank #3 and an estimated long-term earnings growth rate of 7.8%.
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Sonoco Products Company (SON) : Free Stock Analysis Report
Sealed Air Corporation (SEE) : Free Stock Analysis Report
Packaging Corporation of America (PKG) : Free Stock Analysis Report
Graphic Packaging Holding Company (GPK) : Free Stock Analysis Report
Greif, Inc. (GEF) : Free Stock Analysis Report
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