The Containers - Paper And Packaging industry has been gaining from continued demand growth, backed by new technology and innovative products, as well as a relatively stable supply-and-demand balance. Growing urbanization, development of retail chains and promising healthcare and cosmetics sectors are spurring demand for containers and packaging, mainly in emerging economies.
Most of the companies in the Containers - Paper And Packaging industry serve a wide variety of markets, mainly catering to the food-and-beverage, household products, and pharmaceutical sectors. Also, the evolution of e-commerce has significantly impacted demand in the industry with every passing year. Going forward, packaging players are likely to gain from capitalizing on growing global demand for eco-friendly biodegradable packaging materials aided by environmental concerns.
However, escalating raw-material costs due to the imposition of tariffs is now a major drawback for the industry as it affects industry margins. Thus, the companies have to pass through as much of the raw-material price inflation as possible to customers in order to remain competitive.
Industry Underperforming S&P 500 & Sector
Looking at shareholder returns over the past year, it appears that a tough operating environment has been plaguing the Containers - Paper And Packaging industry’s performance. Further, the industry is facing competition not only from direct competitors, but also from the constant threat of substitution by alternative product materials.
The Zacks Containers - Paper And Packaging, which is a 9-stock group within the broader Zacks Industrial Products Sector, has underperformed the S&P 500, as well as its own sector, over the past year. While the stocks in this industry have collectively gained 2%, the Zacks S&P 500 Composite and Zacks Industrial Products Sector have rallied around 18% and 9%, respectively, during the same time frame.
One-Year Price Performance
Group Trading Cheaper Than Sector
Regardless of the underperformance of the industry over the past year, its valuation hardly looks cheap now. The Containers-Paper And Packaging industry’s valuation could be roughly assessed on the basis of its EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio performance.
The Containers, Paper And Packaging industry is a capital-intensive industry with high fixed costs. Therefore, even a marginal dip in revenues might affect the bottom line to a large extent, as companies are unable to reduce costs in order to offset the impact on earnings. Thus, the EV/EBITDA multiple is a preferred valuation metric for such industries that have significant fluctuations in earnings from one quarter to the next.
Going by this multiple, the valuation for the Containers- Paper And Packaging industry looks a bit stretched, at the moment, when compared to the broader market and its own sector.
The industry has a trailing 12-month EV/EBITDA ratio of 12.3, which is currently below its one-year median of 12.9. However, the industry compares unfavorably with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.7 and the median level is 11.5.
Enterprise Value/EBITDA (TTM)
However, as containers – paper and packaging stocks have unique characteristics, a comparison of the group’s EV/EBITDA ratio with that of its broader sector is probably the best approach. Such a comparison ensures that the group is trading at a decent discount. The Zacks Industrial Products Sector’s trailing 12-month EV/EBITDA ratio of 13.9 and the median level of 15.1 for the same period are way above the Zacks Containers - Paper And Packaging Industry’s respective ratios.
Enterprise Value/EBITDA (TTM)
Improving Earnings Outlook to Drive Outperformance
The Containers, Paper And Packaging industry is expected to grow driven by the surging demand for sophisticated packaging for several consumer goods and products. Further, lower costs for old corrugated container will aid margins. The industry’s growth will also be supported by focus on expanding geographic reach through M&A activities.
But what really matters to investors is whether or not this group has the potential to perform better than the broader market in the quarters ahead.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance, going forward, is the industry's earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry clearly shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018. There is a clear uptrend in both the year's consensus estimates.
Price and Consensus: Zacks Containers - Paper And Packaging Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of the aggregate consensus expectations for 2018.
Current Fiscal Year EPS Estimate Revisions
Please note that the $2.88 'EPS' estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Containers - Paper And Packaging industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the dollar earnings of $2.88 'per share' of the industry for 2018, but how this dollar number has evolved recently.
As you can see here, the $2.88 'EPS' estimate for 2018 is up from $2.85 reported at the end of March and $2.67 this time last year. In other words, the sell-side analysts covering the companies in the Zacks Containers - Paper And Packaging industry have been steadily raising their estimates.
Zacks Industry Rank Indicates Gloomy Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates persistent underperformance in the near term.
The Zacks Containers - Paper And Packaging industry currently carries a Zacks Industry Rank #236, which places it at the bottom 8% 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.
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over the past seven weeks except one.
Containers, Paper And Packaging Stocks Promise Long-Term Growth
The long-term (3-5 years) EPS growth estimate for the Zacks Containers - Paper And Packaging industry appears promising. The group’s mean estimate of long-term EPS growth rate has risen significantly from June 2018 to reach the current level of 10.3%. This compares to 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
One key reason for this long-term EPS growth could be the recovery in the top line that stocks in this industry group have been displaying since the beginning of 2015. This has been mainly led by focus on process improvements and investment in equipment designed in a bid to minimize scrap as well as rise in e-commerce sales.
Lately, the objective of the Containers - Paper And Packaging industry has shifted from only containing and protecting the product to providing sustainable packaging solutions to cater to increasing consumer awareness on environmental issues. Thus, industry players will benefit from focus on maintaining quality of the package, conforming to industry-standards and ability to minimize carbon footprint. However, higher costs from rising fuel and freight charges and volatile raw material may weigh on the near-term prospects of the industry.
Below we have discussed a couple of stocks that investors can hold on to gain a footing in this industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AptarGroup, Inc. (ATR): This Crystal Lake, IL based company has a Zacks Rank #3 (Hold). The stock has returned 25% over the past year. The Zacks Consensus Estimate for the current-year EPS has moved 4.5% higher over the last 60 days.
Price and Consensus: ATR
Bemis Company, Inc. (BMS): The consensus EPS estimate for this Neenah, WI-based supplier of flexible and rigid plastic packaging company has increased 0.4% over the last 60 days. The stock rallied 20% over the past year. It carries a Zacks Rank #3.
Price and Consensus: BMS
Sonoco Products Company (SON): This Hartsville, SC, based consumer packaging company has a Zacks Rank #3. The stock has returned 16% over the past year. The Zacks Consensus Estimate for the current-year EPS has moved 1.5% upward over the last 60 days.
Price and Consensus: SON
However, a stock that carries a bearish Zacks Rank and we would recommend investors to stay away from for the time being, is Berry Global Group, Inc. (BERY).
Headquartered at Evansville, IN, Berry Global carries a Zacks Rank #5 (Strong Sell). The stock has lost 20% over the past year. The Zacks Consensus Estimate for earnings for 2018 has been revised 7.7% downward, over the last 60 days.
Price and Consensus: BERY
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