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WestRock (WRK) Down 11.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
Cabot (COG) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for WestRock (WRK). Shares have lost about 11.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is WestRock due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

WestRock Earnings Beat, Sales Miss Estimates in Q2

WestRock delivered second-quarter fiscal 2019 (ended Mar 31, 2019) adjusted earnings of 80 cents per share, surpassing the Zacks Consensus Estimate of 63 cents. However, the reported figure declined 3.6% from the 83 cents earned in the prior-year quarter.
 
Including one-time items, the company reported earnings per share of 62 cents in the reported quarter compared with the prior-year quarter’s 86 cents.

Operational Update
 
WestRock’s total revenues jumped 15% year over year to $4,620 million. However, the top-line figure missed the Zacks Consensus Estimate of $4,652 million.

The year-over-year improvement in total sales primarily stemmed from the increased sales in Corrugated Packaging segment, aided by the KapStone acquisition, higher selling price/mix and strength in the North American container business. However, the absence of recycling sales in the current-year quarter, lower containerboard volumes and unfavorable foreign currency impact offset sales to some extent.

Cost of sales increased 15.2%, year over year, to $3,720.4 million in the fiscal second quarter. Gross profit climbed 14% year over year to $900 million. Gross margin came in at 19.5% compared to the 19.6% recorded in the prior-year period. Adjusted segment EBITDA was $757 million compared with $649 million reported in the prior-year quarter.

Total segment income came in at $396 million, up from $373 million witnessed in the year-ago quarter. This upside was backed by increase in Corrugated Packaging segment income, along with decline in both Land and Development and Consumer Packaging segments’ income.

Segment Performance
 
Corrugated Packaging: Sales in the segment improved 25% year over year to $2,990.7 million in the reported quarter. Adjusted segment EBITDA jumped 24.4% year over year to $553 million. Segment income came in at $310.3 million in the quarter, reflecting year-over-year increase of 18%.

Consumer Packaging: Sales in this segment were up 2% to $1,668.3 million from the year-ago quarter. Adjusted segment EBITDA was up 1.4% year over year to $225.6 million. Segment income was $85.2 million in the March-end quarter compared with the prior-year quarter’s $94.6 million.
 
Land and Development: The segment’s sales came in at around $0.8 million compared with $26.7 million posted in the year-earlier quarter. The segment income was $0.5 million in the fiscal second quarter 2019 compared with $16.2 million witnessed in the year-ago quarter.
 
Financial Position
 
As of Mar 31, 2019, cash and cash equivalents were $154.2 million, significantly down from $636.8 million as of Sep 30, 2018. As of quarter end, total debt was $10.8 billion, up from $6.4 billion as of Sep 30, 2018. Cash flow from operations came in at $362 million in the second quarter of fiscal 2019 compared with $228 million recorded in the prior-year quarter.
 
During the January-March quarter, WestRock received $60 million of insurance proceeds related to the Panama City mill.  Moreover, WestRock invested $303 million in capital expenditures, paid $118 million in dividends and returned $44 million to stockholders through stock repurchases during the fiscal second quarter.
 
On Nov 2, 2018, WestRock completed the acquisition of rival KapStone Paper and Packaging Corporation. The company anticipates to achieve approximately $200 million in synergies and performance improvements by the end of fiscal 2021 through the integration of the former KapStone operations into WestRock’s corrugated business.

The company achieved $70 million of run-rate synergies toward the $200-million target for the KapStone acquisition. WestRock also focuses on productivity, operational excellence as well as debt reduction, while returning cash to shareholders.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.04% due to these changes.

VGM Scores

At this time, WestRock has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, WestRock has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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