4 Packaging Stocks to Watch Amid Industry Headwinds
The Zacks Containers - Paper and Packaging industry is currently facing weak demand due to lower consumer spending amid an inflationary backdrop and high interest rates. Nevertheless, the industry will get support from rising e-commerce activities, and solid demand for sustainable and eco-friendly packaging options due to increasing environmental concerns. Pricing actions implemented by the industry players will help offset the impacts of the ongoing supply-chain disruptions and elevated costs.
Despite the odds, AptarGroup ATR, Sonoco Products Company SON, Greif, Inc. GEF and Karat Packaging KRT are set to gain from these trends.
About the Industry
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.
What's Shaping the Future of the Containers - Paper and Packaging Industry
High Costs & Supply-Chain Woes Remain Challenging: The industry participants continue encountering supply-chain disruptions and higher raw material costs stemming from various factors like general inflationary pressure, limited availability of certain raw materials and global transportation disruptions. Higher labor, transportation and chemical costs aggravated their woes. The shortage of labor impacted their production levels and impaired their ability to meet high demand. The companies have been implementing cost-reduction actions for a while, which are likely to sustain margins. Industry players focus on streamlining their operations and realigning with high-growth key markets to bolster their performances. Some companies recently witnessed declines in volumes due to lower consumer spending on goods, given the inflationary scenario. However, this is a temporary setback as volumes will eventually pick up as these pressures subside.
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 increased manifold as it maintains the integrity and durability of a product. Packaging also helps withstand the complex product delivery process. Per Statista, revenues in the eCommerce market are projected to reach $3.58 trillion in 2023. Revenues are expected to grow, seeing a CAGR of 11.2% to $5.47 trillion by 2027. In 2021, e-commerce accounted for nearly 19% of global retail sales. By 2026, the online segment is anticipated to be 25% of the total global retail sales. 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, keeping the demand for packaging applications fairly stable across economic cycles.
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 already began incorporating recycled content into production methods. By maximizing recycling, the industry can implement environmentally and economically sustainable production methods.
Zacks Industry Rank Indicates Bleak Prospects
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 #213, which places it at the bottom 15% of the 251 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 outperform 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. But it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Versus Broader Market
The Containers - Paper and Packaging industry has underperformed the S&P 500 and the sector over the past year. The industry has fallen 2.9% compared with the S&P 500’s growth of 14%. The Industrial Products sector has meanwhile gained 22.6%.
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 Containers - Paper and Packaging companies, we see that the industry is currently trading at 17.90X compared with the S&P 500’s 11.64X and the Industrial Products sector’s forward 12-month EV/EBITDA of 14.54X. 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 traded as high as 30.07X and as low as 10.95X, the median being 18.35X.
4 Containers - Paper and Packaging Stocks to Keep an Eye on
Greif: The company was implementing cost rationalization measures within its system, which led to the highest-ever second-quarter free cash flow in the company's history in the second quarter of fiscal 2023. Adjusted EBITDA in the quarter was $228.6 million, the second-highest EBITDA on record in a second quarter in the company’s history. It has been active on the acquisition front over the past few years and its M&A pipeline remains solid. The company plans to continue to deploy capital toward value-accretive targets in the coming quarters. In 2022, Greif completed the acquisition of Lee Container, providing Greif with immediate scale in jerry cans and small plastic bottles in North America. Lee Container's end market will enable Greif's transition to less cyclical end-market exposures. The company recently increased its ownership in Centurion Container from 10% to 80%, which will enhance Greif’s resin-based offering and Intermediate Bulk Containers (IBC) business in North America, and boost margins for the Global Industrial Packaging segment. The company’s shares have gained 13% in a year.
The Zacks Consensus Estimate for Greif’s 2023 earnings has been revised 12.6% upward over the past 60 days. Greif has a trailing four-quarter earnings surprise of 7.7%, on average. The Delaware, OH-based player has an estimated long-term earnings growth rate of 10% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: GEF
AptarGroup: The company’s Beauty segment will continue to gain from increased demand for beauty and personal care markets. The Pharma segment is witnessing steady demand growth for prescription and consumer healthcare. Given the ongoing sales momentum in elastomer components and active material solutions, AptarGroup is expanding its capacity to produce elastomer components for injected medicines and active material science solutions, which will drive near-term growth. The company has embarked on a business-transformation plan that will drive top-line growth, boost operational excellence, enhance its approach to innovation and improve organizational effectiveness. Backed by its efforts to bring 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. Shares of ATR have gained 13.9% over the past year.
The Zacks Consensus Estimate for AptarGroup’s fiscal 2023 earnings has moved 3% north in the past 60 days. The figure indicates year-over-year growth of 9.8%. This Crystal Lake, IL-based company has a trailing four-quarter earnings surprise of 6.4%, on average. The stock estimated a long-term growth rate of 7% and has a Zacks Rank #2 (Buy) at present.
Price & Consensus: ATR
Sonoco: The company’s consumer packaging business is primarily benefiting from the Ball Metalpack acquisition completed last year. Ball Metalpack is a foremost producer of sustainable metal packaging for food and household products, and the largest manufacturer of aerosol products in North America. The deal supported Sonoco’s focus on investing in the core business that strengthens its global Paper Cans and Closures business, while bolstering its sustainable packaging portfolio with metal packaging. SON is also implementing aggressive price actions across its businesses to counter higher raw material and non-material inflation. This, combined with its focus on optimizing businesses through productivity improvement, standardization and cost control, will drive Sonoco’s results in the near term. SON is focused on increasing investment in its core consumer and industrial businesses, and achieving an annual EBITDA of $1 billion by 2026.
The Zacks Consensus Estimate for Sonoco’s fiscal 2023 earnings has moved north by 0.5% in the past 60 days. The Hartsville, SC-based company has a trailing four-quarter earnings surprise of 5.8%, on average. The company currently has a Zacks Rank #3 (Hold) and estimated long-term growth of 5%.
Price & Consensus: SON
Karat Packaging: The company is benefitting from robust demand for its eco-friendly products and other offerings. With growing pressure on countries across the globe to enact new regulations to ban Styrofoam and single-use plastic, the company is poised well to capitalize on increased demand for compostable products. It is planning to expand the manufacturing capacity in its Taiwan joint venture, and accelerate its initiative to build a bagasse factory in the United States in 2023, using the proprietary manufacturing processes of the Taiwan facility. KRT is implementing initiatives to significantly boost online sales. It is also expanding its distribution network. Shift to higher-margin products, such as environmentally-friendly products, will boost its margins. The growing preference for food delivery, take-out and at-home dining is another key catalyst.
The Zacks Consensus Estimate for Karat Packaging’s 2023 earnings suggests growth of 7.7% from the last year’s reported figure. KRT has a trailing four-quarter earnings surprise of 16.1%, on average. The Chino, CA-based company has an estimated long-term earnings growth rate of 10% and a Zacks Rank of 3 at present.
Price & Consensus: KRT
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AptarGroup, Inc. (ATR) : Free Stock Analysis Report
Sonoco Products Company (SON) : Free Stock Analysis Report
Greif, Inc. (GEF) : Free Stock Analysis Report
Karat Packaging Inc. (KRT) : Free Stock Analysis Report
