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Why Is WestRock (WRK) Up 20.9% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for WestRock (WRK). Shares have added about 20.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is WestRock due for a pullback? 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 Beats on Q2 Earnings, Scraps '20 Guidance

WestRock delivered second-quarter fiscal 2020 adjusted earnings of 67 cents per share, surpassing the Zacks Consensus Estimate of 60 cents. However, earnings declined 16.2% from the prior-year quarter figure of 80 cents per share.

Including one-time items, the company reported earnings per share of 57 cents in the reported quarter, down 8% from the prior-year quarter’s 62 cents.

Operational Update

WestRock’s total revenues slid 3.7% year over year to $4,447 million. Moreover, the revenue figure missed the Zacks Consensus Estimate of $4,485 million.

Cost of sales was down 2% year over year to $3,643 million in the fiscal second quarter. Gross profit declined 10.5% year over year to $805 million. Gross margin came in at 18.1% compared with the 19.5% reported in the prior-year period. Adjusted segment EBITDA was $708 million compared with the $757 million witnessed in the year-earlier quarter. Total segment income was around $335 million, down from the year-ago quarter’s $396 million.

Segmental Performance

Corrugated Packaging: Sales in the segment dipped 3.6% year over year to $2,883 million in the March-end quarter primarily due to lower corrugated selling price/mix and unfavorable impacts of foreign currency, partly offset by higher volumes. Adjusted segment EBITDA declined 9.2% year over year to $502 million.

Consumer Packaging: Sales in the segment were down 3.1% year over year to $1,616 million. This downside resulted from lower selling price/mix, dismal volumes and unfavorable foreign-currency translation impact. Adjusted segment EBITDA edged down 1.8% year over year to $222 million.

Financial Position

As of Mar 31, 2020, cash and cash equivalents were $640 million, significantly up from $152 million as of Sep 30, 2019. As of Mar 31, 2020, total debt was $10.8 billion, up from $10.1 billion as of Sep 30, 2019. Cash flow from operations was $168 million in the fiscal second quarter compared with the $362 million reported in the year-earlier quarter. WestRock invested $241 million in capital expenditure and paid out $121 million in dividends in the reported quarter.

The company is executing strategies for financial strength and substantial liquidity to counter the pandemic-related setbacks. WestRock is decreasing salaries and retainers by up to 25% for the company’s senior executive team and board of directors as well as reducing its discretionary expenses. The company is lowering capital investments by approximately $150 million to $950 million for fiscal 2020 while reducing capital investments to $600-$800 million for fiscal 2021. It will pay a quarterly dividend of 20 cents per share for an annual rate of 80 cents per share. WestRock expects to have an additional $1 billion in cash available for debt reduction through fiscal 2021.

Suspends Guidance

The company has withdrawn the fiscal 2020 guidance for net sales, adjusted segment EBITDA, adjusted operating cash flow and adjusted free cash on the coronavirus pandemic-related concerns.

 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -48.9% due to these changes.

VGM Scores

Currently, WestRock has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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 B. 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. It's no surprise WestRock has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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