Per the latest Earnings Preview, the Basic Material sector's earnings are expected to rise 0.5% in the fourth quarter of 2018 while sales are projected to increase 4.3% (as on Jan 25).
The Paper And Related Products industry falls under the Basic Material sector and comprises an array of companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products which range from graphic paper, packaging paper to absorbent hygiene products. Although the players in the industry are gaining from rising demand from packaging, their margins will likely bear the brunt of the recent uptrend in raw material costs, transportation costs, chemical costs and fuel costs in the to-be-reported quarter.
Growing consumer awareness regarding sustainable packaging, preference over plastic, skyrocketing e-commerce activities and increasing demand for hygiene products are some of the factors favoring market growth for the paper and related product stocks. Moreover, improving disposable incomes of people, especially in the developing countries is one of the primary catalysts. Notably, the paper and related products industry will be spurred by packaging demand, going forward. The global paper & paperboard packaging market, which was at $175 billion in 2017, is expected to reach $267 billion by 2026 at a CAGR of 4.8%.
However, the transition to digital media is an ever-looming threat to the graphic paper segment which has been suffering declines over the past few years. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs has taken a toll on graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers.
Apart from high raw material costs, the industry has been affected by rising transportation costs, chemical costs and fuel costs lately. The companies in the industry are focused on cost reduction programs and are resorting to digital manufacturing in order to reduce costs further.
Let’s take a sneak peek at how two major paper and related products stocks, International Paper Company IP and WestRock Company WRK scheduled to report December-end quarter earnings before the opening bell on Jan 31, are likely to fare.
Predictions for International Paper
International Paper delivered an improvement of 54% and 7% in earnings and revenues, respectively, in the third quarter of 2018. Further, both the top and bottom line beat their respective Zacks Consensus Estimate. Investors are keen to know whether the company can repeat the feat in fourth-quarter 2018. Notably, the company trumped the Zacks Consensus Estimate in the trailing four quarters, recording average surprise of 6.91%.
International Paper Company Price and EPS Surprise
International Paper Company price-eps-surprise | International Paper Company Quote
Hurricane Florence had a negative impact of $36 million on International Paper’s third-quarter results, which included $8 million in volume and $28 million in operations. Notably, three mills and three box plants were impacted. The company expects a $15 million impact in the fourth quarter, primarily in the Global Cellulose Fibers business. Distribution costs are trending upwards lately owing to a very tight truck and rail availability as well as higher diesel fuel cost. This along with elevated input costs (fiber, chemicals, energy, and freight) will suppress margins in the to-be-reported quarter.
However, its segments are expected to report growth in both revenues and profits. .International Paper's North American Industrial Packaging business has consistently outperformed industry shipments in the first three quarters of 2018. The company is witnessing strong demand across all channels. In the Global Cellulose Fibers business, the company delivered record fluff pulp shipments during the third quarter, despite the impact of Hurricane Florence. Global pulp demand remains strong and demand in the fluff segment continues to grow at 4-5% annually. In the Printing Papers segment, improved global demand will bolster segment revenues.
The Zacks Consensus Estimate for total sales for International Paper is currently pegged at $5,856 million for the to-be-reported quarter, which indicates an increase of 2.5% from the prior-year quarter. The Zacks Consensus Estimate for earnings is $1.61, reflecting year-over-year growth of around 27%. (Read more: International Paper Q4 Earnings: What's in the Cards?)
Our proven model does not conclusively show a beat for International Paper this earnings season as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
You can see the complete list of today’s Zacks #1 Rank stocks here.
International Paper has an Earnings ESP of -2.48% and a Zacks Rank #4 (Sell), which makes surprise prediction inconclusive. As it is, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Predictions for WestRock
WestRock is set to report first-quarter fiscal 2019 results. In the trailing four quarters, the company recorded average positive surprise of 5.96%. In the last reported quarter, the company’s top line showed a 4% improvement and its bottom line surged 48% year over year. Earnings and revenues also beat the respective Zacks Consensus Estimate.
WestRock Company Price and EPS Surprise
WestRock Company price-eps-surprise | WestRock Company Quote
WestRock is likely to benefit from favorable demand, price and mix trends across its paper and packaging businesses in the first quarter of fiscal 2019. The Zacks Consensus Estimate for total revenues is pegged at $4.6 billion in the fiscal first quarter, projecting year-over-year growth of 18%. WestRock is likely to witness sales growth in its major segments — Consumer Packaging and Corrugated Packaging. Pricing will be higher in both segments as a result of previously announced price increases. However, volumes will be lower owing to seasonality in the consumer business.
WestRock projects adjusted segment EBITDA in the to-be-reported quarter to be between $737 million and $767 million, lower than the $802 million reported in fourth-quarter fiscal 2018. EBITDA performance will be aided by the KapStone acquisition, productivity and performance improvement programs along with cost-saving actions. However, a scheduled maintenance downtime across corrugated and consumer mills of 60,000 tons, two fewer shipping days in the box business, higher group insurance cost and decline in non-cash pension income will impact EBITDA in the to-be-reported quarter. Further, lost production resulting from the Hurricane Michael will also dent EBITDA. The Zacks Consensus Estimate for earnings is pegged at 81 cents, indicating a year-over-year decline of 7%. (Read more: WestRock to Report Q1 Earnings: What's in the Offing?)
WestRock has a Zacks Rank #3 which combined with a ESP of -0.49% makes earnings surprise prediction difficult.
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