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Paper & Related Products Industry: Near-Term Prospects Gloomy

Madhurima Das

The Paper and Related Products industry comprises 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.
Graphic papers, which primarily include printing and writing papers, and newsprint, are utilized for communication purposes. The industry also provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps that are utilized in absorbent hygiene products, tissue and paper products.

The industry participants serve a wide array of industries, ranging from food and beverage, farming and agriculture, home and personal care, health, retail and e-commerce to shipping and transport, among others. WestRock Company (WRK) and International Paper Company (IP) are two major players in this industry.

Let us take a look at the three major themes in the industry:

  • The transition to digital media has been the primary cause for declines in the graphic paper segment and remains a persistent threat. Paperless communication, increased use of email, less print advertising, more electronic billing and fewer catalogs have dented graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers.
  • The Paper and Related Products industry is likely to regain some vigor in the form of packaging demand in the days ahead spurred by preference over plastic packaging owing to environmental concerns. The global paper & paperboard packaging market, which was worth $175 billion in 2017, is expected to reach $267 billion by 2026 – at a CAGR of 4.8%. Increasing demand for hygiene products and rising e-commerce activities will fuel growth. Per Statista, global retail e-commerce sales are set to grow to $4.88 trillion in 2021 from $2.3 trillion in 2017. Moreover, improving disposable income, especially in developing countries, is one of the primary catalysts.
  • Apart from high raw material costs, the industry has been affected by rising transportation, chemical and fuel costs. Consequently, the industry players are focused on cost reduction and resorting to digital manufacturing for the same. The paper industry has already begun incorporating recycled content into its production methods. By maximizing recycling, the industry will be able to implement environmentally and economically sustainable production methods. Further, investment in breakthrough technologies will spur demand for high-quality paper products.

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 Paper and Related Products industry, which is a 16-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #239, which places it at the bottom 6% 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 position 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. Since the beginning of this year, the industry’s earnings estimate for the current year has gone down 29%.

Despite the bleak near-term prospects, we will present a few Paper and Related Products stocks that can be retained in one’s portfolio given their long-term prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500 and Sector on Shareholder Returns

The Paper and Related Products industry has underperformed the S&P 500 over the past year. The stocks in this industry have collectively declined 45.0%, the Zacks S&P 500 composite has dipped 0.4%. Meanwhile, the Zacks Basic Materials sector fell 17.2%.

One-Year Price Performance

Paper and Related Products Industry’s Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 6.2x compared with the S&P 500’s 11.5x and the Basic Material sector’s forward 12-month EV/EBITDA of 5.4x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry has traded as high as 6.8x and as low as 4.1x, with the median being 5.7x.
Bottom Line
Despite threat from increasing digitization, rising global demand for paper packaging, tissue papers and hygiene products will help sustain the Paper and Related Products industry. Further, boom in e-commerce and rising demand in developing countries will act as catalysts.
We are presenting one stock with a Zacks Rank #2 (Buy) and three with a Zacks Rank #3 (Hold) that investors may take a look at.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Neenah Paper, Inc. (NP): The Alpharetta, GA-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 has gone up 2% over the past 90 days.

Price & Consensus: NP

WestRock Company: The Atlanta, GA-based company carries a Zacks Rank #3. The company has a positive average earnings surprise history of 10.90% and a long-term estimated earnings growth rate of 4.52%.

Price & Consensus: WRK

Clearwater Paper Corporation (CLW): This Spokane, WA-based company carries a Zacks Rank #3. The company has a positive average earnings surprise history of 6.10%. Its estimates for the current fiscal have undergone positive estimate revision over the past 90 days. The company has a long-term estimated earnings growth rate of 5%.

Price & Consensus: CLW

Glatfelter (GLT): The York, PA-based company has a long-term estimated earnings growth rate of 5%. The Zacks Consensus Estimate for fiscal 2019 has an expected growth rate of 242.86%. The stock carries a Zacks Rank #3.

Price & Consensus: GLT

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