The Zacks Containers - Paper And Packaging industry primarily includes companies which manufacture paper and plastic-based packaging products utilized within consumer and industrial end markets. Their products range from containerboard and corrugated packaging to flexible and rigid plastic packaging.
The industry participants serve a wide array of markets including food, beverage, foodservice and other consumer products like beauty, personal care and home care. The industry also serves the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets.
Let us take a look at the three major themes currently governing the industry:
- Demand in the Containers - Paper And Packaging industry is usually fairly stable across economic cycles, due to its high exposure (more than 60%) to steady consumer-oriented end-markets, such as food and beverages and healthcare as they include essentials used in day-to-day lives. Favorable consumer spending, strong labor market, rising government expenditures instill further optimism. Moreover, rapid urbanization and rising purchasing power in Asia, particularly China, India, and Southeast Asia will sustain demand for packaging going forward. Additionally, demand for sophisticated packaging is on the rise and the industry is constantly striving to meet this by adopting new technology and innovative products. It is also likely to gain from capitalizing on growing global demand for eco-friendly biodegradable packaging materials spurred by environmental concerns.
- The evolution of e-commerce has significantly impacted demand in the industry. Notably, packaging has been gaining importance over the years as it not only has to maintain the safety of the product but also be durable enough to withstand the complex automated and manual supply chains involved in delivering the product. According to Statista, global retail e-commerce sales are anticipated to grow to $4.88 trillion in from $2.3 trillion in 2017. In developed markets, e-commerce has become second nature for consumers, while developing countries are catching up. India is one of the fastest growing e-commerce markets and according to the India Brand Equity Foundation, it is expected to reach $120 billion by 2020 from $39 million in 2017.
- Apart from high raw material costs, the industry has been bearing the brunt of rising transportation costs, chemical costs and fuel costs. Consequently, the companies have to pass on as much of the raw-material price inflation as possible to customers. However, it might not always be feasible to pass on the price increase to customers. Consequently, the companies are now focusing on reducing costs, improving productivity and in turn increasing profitability.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Containers - Paper And Packaging industry, which is a nine stock group within the broader Zacks Industrial Products sector, carries a Zacks Industry Rank #171, which places it at the bottom 33% of 256 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 industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over a year’s time, the industry’s earnings estimate for the current year has gone down 5%.
Despite the bleak near-term prospects of the industry, we will present a few Containers - Paper And Packaging stocks that can be retained in one’s portfolio given their prospects in the long haul. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector but Lags S&P 500
The Containers - Paper And Packaging industry has outperformed its own sector over the past year. However, it has underperformed the Zacks S&P 500 composite over the same time frame.
Over this period, the industry has fallen 4.3% compared with the sector's decline of 7.4%. Meanwhile, the Zacks S&P 500 composite gained 3.6%.
One-Year Price Performance
Containers - Paper And Packaging Industry's Valuation
On the basis of 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 11.5 compared with the S&P 500's 10.9x and the Industrial Products sector's forward 12-month EV/EBITDA of 13.9. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Over the last five years, the industry has traded as high as 14.1x to as low as 10.2x, recording the median of 12.2x.
The Containers - Paper And Packaging industry will be supported by persistent demand growth and investment in new technology and innovative products. The boom in e-commerce will sustain demand in years to come. However, higher costs from rising fuel and freight charges, and volatile raw material may weigh on the industry’s near-term prospects.
We are presenting two stocks with a Zacks Rank #2 (Buy) and two with Zacks Rank #3 (Hold) that investors may consider betting on.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
AptarGroup, Inc. (ATR): This Crystal Lake, IL-based provider of packaging, dispensing, and sealing solutions primarily for the beauty, personal care, home care, prescription drug, consumer health care, injectable, and food and beverage markets has delivered a positive average earnings surprise of 8.27% over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects growth of 8.75%. The estimate for fiscal 20198 has gone up 3% over the past 60 days. The company has an estimated long-term earnings growth rate of 10.3%. The stock carries a Zacks Rank #2.
Price and Consensus: ATR
Sonoco Products Company (SON): This Hartsville, SC-based manufacturer and seller of industrial and consumer packaging products carries a Zacks Rank #2. The company has a positive average earnings surprise of 5.74% over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects growth of 6.23%. The estimate for fiscal 2019 has gone up 2% over the past 60 days. The company has an estimated long-term earnings growth rate of 4.7%.
Price and Consensus: SON
Sealed Air Corporation (SEE): This Charlotte, NC-based company provides food safety and security, and product protection solutions worldwide. It currently carries a Zacks Rank #3. The company has a positive average earnings surprise of 6.87% over the trailing four quarters. The Zacks Consensus earnings estimate for fiscal 2019 reflects year-over-year growth of 9.2%. The company has an estimated long-term earnings growth rate of 8.9%.
Price and Consensus: SEE
Bemis Company, Inc. (BMS): This Neenah, WI-based supplier of flexible and rigid plastic packaging company has delivered a positive average earnings surprise of 2.48% over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects growth of 7.2%. The company has an estimated long-term earnings growth rate of 7.3%. The stock carries a Zacks Rank #3.
Price and Consensus: BMS
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