Chicago, IL – November 21, 2024 – Today, Zacks Equity Research discusses Packaging Corporation of America PKG, AptarGroup ATR and Sealed Air SEE.
Link: https://www.zacks.com/commentary/2373003/3-packaging-stocks-to-keep-an-eye-on-despite-industry-challenges
The Zacks Containers - Paper and Packaging industry has been facing weak demand due to lower consumer spending amid an inflationary backdrop. Pricing actions implemented by the industry players will help offset the impacts of supply-chain disruptions and elevated costs. The industry will eventually gain support from rising e-commerce activities, and solid demand for sustainable and eco-friendly packaging options due to increasing environmental concerns.
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, extend the shelf life, and cut down on 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.
They also encountered supply-chain disruptions, and higher material, labor and transportation costs. The companies have been implementing cost-reduction actions for a while in this situation to sustain margins. They have also been streamlining their operations and taking steps to realign with high-growth key markets to bolster their performances. There are also signs that supply-chain issues are easing and customer destocking seems to be over, which could bring some relief in the near future.
E-commerce Acts as 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 maintains the integrity and durability of a product. Packaging also helps withstand the complex product delivery process. In 2023, e-commerce accounted for more than 19% of retail sales worldwide. The same is projected to increase to 25% by 2027.
According to Statista, global e-commerce sales are expected to see a compound annual growth rate (CAGR) of 9.5% between 2024 and 2029. Turkey is expected to lead the retail e-commerce development with a projected CAGR of 11.58% over this period, closely followed by Brazil and India. The U.S. retail e-commerce market is expected to cross the $1.5-trillion mark in 2026 and grow, seeing a CAGR of 9% between 2024 and 2029.
These solid projections bode well for the Containers - Paper and Packaging industry. Also, the industry has significant exposure (more than 60%) to consumer-oriented end markets, such as food and beverages, and healthcare. Demand for packaging applications remains fairly stable for these sectors across economic cycles, thus ensuring consistent demand for packaging solutions.
Demand for Eco-Friendly Packaging to Aid Industry: The preference for environmentally friendly biodegradable packaging materials is witnessing a steady rise globally, courtesy of customers’ increasing awareness of environmental issues. The industry is constantly striving to meet the same by adopting the latest technology and bringing innovative products. Industry players have begun incorporating recycled content into production methods. By maximizing recycling, the industry can implement environmentally and economically sustainable production methods.
The Zacks Containers - Paper and Packaging industry is a 12-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #160, which places it at the bottom 36% of the 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak prospects in the near term. 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.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. However, it is worth taking a look at the industry’s shareholder returns and current valuation first.
The Containers - Paper and Packaging industry has underperformed the S&P 500 and the sector over the past year. The industry has rallied 20.6% compared with the S&P 500’s growth of 30.6%. The Industrial Products sector has, meanwhile, risen 29.3%.
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Containers - Paper and Packaging companies, we see that the industry is currently trading at 16.34 compared with the S&P 500’s 24.81X and the Industrial Products sector’s forward 12-month EV/EBITDA of 15.76X.
Over the last five years, the industry traded as high as 25.79X and as low as 13.61X, the median being 16.73X.
Packaging Corp: The company’s third-quarter 2024 earnings and revenues improved year over year, driven by higher volume in both segments, and increased prices and mix in the Packaging segment. Strong demand witnessed throughout the quarter led to all-time quarterly records for containerboard production, total box shipments and shipments per day. Backed by this upbeat performance, PKG’s shares have gained 18.5% in the past three months.
The company’s packaging business, which accounts for around 91% of its revenues, is poised to gain from strong demand in e-commerce and stable demand for the packaging of meat, fruit and vegetables, processed food, beverages, and medicines. The company maintains a balanced approach toward capital allocation to boost growth and maximize shareholder returns. Over the past several years, the company has made extensive capital investments in its packaging segment to improve productivity and efficiencies at containerboard mills and corrugated products facilities.
The Zacks Consensus Estimate for Packaging Corp’s ongoing year’s earnings has been revised upward by 4% in the past 60 days. The estimate indicates year-over-year growth of 4.25%. PKG has a trailing four-quarter earnings surprise of 8.6%, on average. The Lake Forest, IL-based company has an estimated long-term earnings growth rate of 7.9%. The company currently flaunts a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
AptarGroup: The company delivered year-over-year growth in its top and bottom lines in the third quarter of 2024, aided by improved performances in the pharma and closures segments. The Pharma segment has been witnessing healthy demand for its proprietary dispensing devices used for nasal decongestants, eye care, cough and cold, and saline rinses, as well as allergic rhinitis, emergency medicines and depression therapies.
Demand for elastomeric components used for biologics continues to be strong. The Beauty segment has also been seeing higher sales in prestige and mass fragrances, along with sales growth in skin care and color cosmetic solutions.
Backed by its efforts to bring innovative products into the market, the company remains the preferred choice for renowned brands worldwide. Focus on acquisitions to expand the scope of technologies, geographic presence and product offerings will also aid growth. ATR shares have gained 11.8% over the past three months.
The Zacks Consensus Estimate for AptarGroup’s fiscal 2024 earnings has moved 0.4% north in the past 60 days. The figure indicates year-over-year growth of 12.6%. This Crystal Lake, IL-based company has a trailing four-quarter earnings surprise of 6.1%, on average. The company has an estimated long-term earnings growth rate of 10.8% and a Zacks Rank #3 (Hold) at present.
Sealed Air: The company’s third-quarter 2024 earnings improved year over year, attributed to its cost take-out to grow program (CTO2Grow Program) and cost-control initiatives. Improvements in the Food segment’s results were offset by the weakness in the Protective segment.
However, the Protective segment is expected to recover in 2025. SEE’s three-year CTO2Grow Program has been designed to drive annualized savings of $140-$160 million by the end of 2025. It has been on track to deliver $90 million of incremental savings in 2024.
Per the program, the company seeks to optimize its portfolio with a focus on automation, digital and sustainable solutions, streamlining its supply-chain footprint, and driving SG&A productivity. SEE shares gained 1.8% over the last three months.
The Zacks Consensus Estimate for Sealed Air’s 2024 earnings has moved up 3% over the past 60 days. SEE has a trailing four-quarter earnings surprise of 34.6%, on average. The Charlotte, NC-based company carries a Zacks Rank #3 at present.
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