On Jul 11, we issued an updated research report on WestRock Company WRK. The company is poised to gain from favorable demand, price and mix trends across its paper and packaging businesses in fiscal 2019 despite higher maintenance downtime and steps taken to reduce inventory. Further, the Kapstone acquisition, productivity and performance improvement programs and cost-saving actions remain tailwinds.
Poised for Improved Fiscal 2019 on Strong Demand
WestRock projects adjusted segment EBITDA in the third quarter of fiscal 2019 to be between $830 million and $870 million, compared with $757 million reported in second-quarter fiscal 2019. Higher seasonal volumes, lower recycled fiber, virgin fiber and seasonally lower energy cost and freight costs will bolster EBITDA. However, higher maintenance downtime will impact results in the June-ending quarter.
In the Corrugated Packaging segment, maintenance downtime will be 104,000 tons in the third quarter of fiscal 2019, higher than 99,000 tons in reported in the previous quarter. In the Consumer Packaging segment, maintenance downtime will be 43,000 tons in the third quarter fiscal 2019 compared with 42,000 tons in second quarter fiscal 2019. Further, higher depreciation expense and interest expense and higher tax rate will impact third-quarter fiscal 2019 earnings per share by 3 cents.
In the Corrugated Packaging segment, the company ended up with approximately 100,000 tons of excess containerboard inventory following the KapStone acquisition. WestRock will continue to reduce inventories to match production with demand which will impact results in the days ahead.
For fiscal 2019, the company anticipates adjusted segment EBITDA within $3.3-$3.4 billion. Compared with the adjusted EBITDA of $2.89 in fiscal 2018, the guidance range reflects an increase of 14-18%. For the Corrugated Packaging segment, maintenance downtime will be 287,000 tons in fiscal 2019 much higher than 233,000 tons in fiscal 2018. For the Consumer Packaging segment, maintenance downtime is estimated at 103,000 tons compared with 47,000 tons in fiscal 2018.
Productivity and performance improvement programs implemented across its manufacturing footprint and other cost savings actions will aid results.
KapStone Acquisition: A Strategic Move
In November, WestRock completed the acquisition of rival KapStone Paper and Packaging Corp. The integration is on track and the company anticipates around $200 million of cost synergies and performance improvements by the end of fiscal 2021. Of this, WestRock has already achieved $70 million in the first half of fiscal 2019 from the targeted $90 million in fiscal 2019.
KapStone’s corrugated packaging operations will enhance the company’s North American corrugated packaging business and provide complementary products in geographical locations that will enable WestRock to serve customers better across the system. The buyout will aid the company in fortifying presence in western United States and enable it to compete better in the growing agricultural markets in the region.
It also accelerates the company’s goal to improve margins of its North American corrugated packaging business. WestRock will also be able broaden portfolio of paper grades, allowing it to tap into the kraft bag market with the inclusion of KapStone's complementary specialty kraft paper offerings. Further, the deal will augment WestRock’s portfolio of virgin fiber-based paper from 65% to 67% as KapStone's 3 million tons of paper is made of 78% virgin fiber and only 22% paper is made from recovered fiber.
Capital Allocation Strategy Right on Track
The company plans to invest approximately $1.4 billion of capital in its business in fiscal 2019. With the completion of many of its strategic capital projects in fiscal 2019 and fiscal 2020, the company projects capital expenditure target of $1 billion in fiscal 2021, which in turn will generate $240 million in annualized EBITDA. In October, WestRock also announced an increase of 5.8% or 10 cents per share in annual dividend to an annualized rate of $1.82 per share. Notably, since its formation, the company has increased dividend by 21%. The company has a dividend yield of more than 4.9%.The company’s net leverage ratio at the end of the second quarter fiscal 2019 was 2.96. WestRock retains its target to lower net leverage ratio to 2.25-2.50.
Shares of WestRock have slumped 36.9% over the past year compared with the industry’s decline of 38.7%.
Zacks Rank & Stocks to Consider
WestRock currently carries a Zacks Rank #3 (Hold)
Investors interested in the Basic Materials sector can consider better-ranked stocks like Flexible Solutions International Inc FSI, Arconic Inc. ARNC and Materion Corporation MTRN, each carrying a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Flexible Solutions has an outstanding projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 177.4% in a year’s time.
Arconic has an estimated earnings growth rate of 36.76% for the current year. The stock has appreciated 48.7% in a year’s time.
Materion has a projected earnings growth rate of 30.25% for the ongoing fiscal. Its shares have rallied 15.7% over the past year.
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