The Zacks Containers - Paper And Packaging industry is likely to continue on growth trajectory on the back of favorable consumer spending, strong labor market, rising government expenditures and increased consumer confidence. Further, rapid urbanization and rising purchasing power in Asia, particularly China, India, and Southeast Asia will sustain demand for packaging going forward.
Consumer End Markets, Innovation to Sustain Growth
The industry includes companies which manufacture paper and plastic-based packaging products. It caters to a wide variety of markets including food, beverage, foodservice, consumer products, chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets. Notably, demand in the Containers - Paper And Packaging industry is usually fairly stable across economic cycles, owing to its high exposure (more than 60%) to stable consumer-oriented end-markets, such as food and beverages and healthcare as they include essentials utilized in day-to-day lives. This ensures stability, steady growth and earnings for the industry.
Demand for sophisticated packaging for several consumer goods and products 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. Nowadays, packaging is not only containing and protecting the product but also includes sustainable packaging solutions to cater to increasing consumer awareness on environmental issues. Consequently, industry players will benefit from focus on maintaining quality of the package, conforming to industry-standards and ability to minimize carbon footprint.
E-commerce Boom to Spur Packaging Demand
The evolution of e-commerce has significantly impacted demand in the industry with each passing year. Packaging has gained utmost importance 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 amounted to $2.3 trillion in 2017 and likely to grow to $4.88 trillion in 2021.
In developed markets, e-commerce has become second nature for consumers, while developing countries are catching up now. India is one of the fastest growing e-commerce markets. In fact, according to the India Brand Equity Foundation, the India e-commerce market is expected to reach $200 billion by 2026 from $39 million in 2017. India is anticipated to surpass the United States to become the second largest e-commerce market globally by 2034, driven by ongoing digital transformation in the country. Among others, South East Asia and Latin America are also picking up pace.
Cost Inflation Remains a Concern
Apart from high raw material costs, the industry has been affected by rising transportation costs, chemical costs and fuel costs lately. Thus, the companies have to pass along 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.
Industry Valuation is Inexpensive
The Containers - Paper And Packaging industry is housed within the broader Zacks Industrial Products sector. It currently carries a Zacks Industry Rank #36, which places it at the top 15% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance 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.
Over the last year, the Containers - Paper And Packaging industry has fallen 17.6% compared with the sector’s decline of 22.2%. Meanwhile, the Zacks S&P 500 composite has declined 6.8%.
However, the valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its Enterprise Value to Earnings before Interest Depreciation and Amortization (EV/EBITDA), which is a commonly used multiple for valuing Containers - Paper And Packaging stocks. On the basis of forward 12-month EV/EBITDA ratio, we see that the industry is currently trading at 9.1 compared with the S&P 500’s 9.8 and the Industrial Products sector’s forward 12-month EV/EBITDA of 10.9.
Stocks to Bet on
We are presenting three stocks in the Containers - Paper And Packaging space with a Zacks Rank #2 (Buy) that investors may consider adding to their portfolio backed by their growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bemis Company, Inc. BMS: This Neenah, WI-based supplier of flexible and rigid plastic packaging company has delivered a positive average earnings surprise history of 4.17% in the trailing four quarters. The Zacks Consensus Estimate for the company’s earnings for fiscal 2019 reflects growth of 7.4%. The company has an estimated long-term earnings growth rate of 20.7%.
Sealed Air Corporation SEE: This Charlotte, NC-based company provides food safety and security, and product protection solutions worldwide. The company has a positive average earnings surprise history of 3.94% over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 10.8%. The company has estimated long-term earnings growth rate of 12.2%.
UFP Technologies, Inc. UFPT: This Newburyport, MA-based company designs and manufactures a range of high-performance cushion packaging and specialty foam and plastic product for the industrial and consumer markets. The company’s Zacks Consensus Estimate for earnings reflects growth of 41.2% for fiscal 2019. The company has a positive average earnings surprise history of 56.74% in the trailing four quarters.
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